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Fiscal and Monetary Policy for Internal and External Stabilization Under Fixed and Floating Rates in the Presence of Capital Movements

Rattan Bhatia
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Rattan Bhatia: International Monetary Fund, Washington (D.C.).

The Pakistan Development Review, 1975, vol. 14, issue 1, 23-32

Abstract: The effect of fiscal and monetary stabilization policies has been extensively discussed, notably by Mundell [4,5] and Fleming [1]. Mundell discussed the problem under the special assumption of a perfect interest-elastic mobility of international capital flows, but Fleming assumed a less than perfect capital mobility. Mundell contends that "fiscal policy completely loses its force as a domestic stabilizer when the exchange rate is allowed to fluctuate," while monetary policy will have appreciable effects on employment and output. Under fixed exchange rates, on the other hand, monetary policy is shown by Mundell to be ineffective while any positive effects of fiscal policy would be conditional upon the country being able to sustain large trade deficits by either borrowing abroad or running down its accumulated international reserves.

Date: 1975
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