Abstract

International Monetary Policy Determinants

It is shown on the basis of a Fleming-Mundell model extended by the international interest rate level what adjustment problems arise in the wake of the monetary and fiscal policies of a national economy dominant in terms of exchange rate policy. With a policy mix of expansionary fiscal and restrictive monetary policies any increase in the international interest rate level invariably means that economies with a demandelastic export structure as a result of restrictive monetary policies are able to compensate the growth-dampening effects that emanate from the rise of the interest rate level by increasing their net exports, whereas no such adjustment policy exists for economies with inelastic export structures; expansionary monetary policies in these countries would even aggravate the existing imbalances. The application of this model to US economic policies in the 1980s helps to provide a consistent explanation of economic developments throughout the world during that period and leads to the recommendation to shift in the coming years the emphasis in the use of economic policy tools from monetary to fiscal and regulatory policies, respectively.