A PARTIAL REHABILITATION OF THE POLICY‐MIX APPROACH

Dietrich Fausten

Kyklos, 1981, vol. 34, issue 2, 203-215

Abstract: The criticism that the Mundellian policy‐mix approach results merely in the financing of external imbalances without effecting their adjustment is reexamined within the context of an aggregative stock adjustment model and found to be suspect. The analysis emphasizes the strategic importance of the desired stock of financial wealth and its susceptibility to monetary and credit policies. In an open economy the aggregate stock of financial wealth can be altered only through the balance of non‐financial transactions with the rest of the world. To the extent that, e.g., credit tightening precipitates an increase in the desired stock of financial wealth, domestic transactors will on balance seek to increase their receipts from/sales to overseas relative to their payments to/purchases from overseas. Thus the consistent pursuit of monetary policy for external balance will induce real adjustments that do contribute to the adjustment of the current account imbalance.

Date: 1981
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