Weak Policy in an Open Economy: The US with a Floating Exchange Rate, 1974-2009

Henry Thompson

Economic Analysis and Policy, 2012, vol. 42, issue 3, 339-350

Abstract: This paper examines the effectiveness of US macroeconomic policy in an open economy model focused on the exchange rate and trade balance. Yearly data cover the period of the dollar float from 1974 to 2009. Monetary expansion raises output weakly but depreciates the dollar and lowers the trade balance. Fiscal “expansion” decreases output. There is a polar deficit effect between the government budget and trade balance. These results question a number of standard policy prescriptions. The implied structural coefficients suggest rethinking a number of accepted theoretical assumptions.

Keywords: fiscal policy; monetary policy; exchange rate; trade balance (search for similar items in EconPapers)
Date: 2012
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecanpo:v:42:y:2012:i:3:p:339-350

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