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Stability with GrowthMacroeconomics, Liberalization and Development$
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Joseph Stiglitz, José Antonio Ocampo, Shari Spiegel, Ricardo Ffrench-Davis, and Deepak Nayyar

Print publication date: 2006

Print ISBN-13: 9780199288144

Published to Oxford Scholarship Online: September 2006

DOI: 10.1093/0199288143.001.0001

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PRINTED FROM OXFORD SCHOLARSHIP ONLINE (oxford.universitypressscholarship.com). (c) Copyright Oxford University Press, 2020. All Rights Reserved. An individual user may print out a PDF of a single chapter of a monograph in OSO for personal use. date: 22 October 2020

Open Economy Complications

Open Economy Complications

(p.87) 6 Open Economy Complications
Stability with Growth

Joseph E. Stiglitz (Contributor Webpage)

José Antonio Ocampo (Contributor Webpage)

Shari Spiegel

Ricardo Ffrench-Davis (Contributor Webpage)

Deepak Nayyar

Oxford University Press

This chapter extends the analysis of the previous chapter to an open economy by introducing exchange rate policy; analyzing the complex relationships between exchange rate, fiscal, and monetary policies; and examining the ways in which capital flows complicate traditional analyses. Despite the greater complexities associated with open economy macroeconomics, the policy conclusions for a closed economy remain remarkably unaffected. While Keynesians and heterodox economists believe that government should actively intervene, conservatives remain skeptical about the desirability of such interventions. The objective of this chapter is to shed some light on how economists can come to such diverse views on economic policy. The first section examines the macroeconomic effects of exchange rates on employment, trade, inflation, aggregate demand, growth, and balance sheets. The second section examines the complex interactions between fiscal, monetary, and exchange rate policies in open economies with either fixed or flexible exchange rate regimes. This section also examines the effects of interest rates and exchange rates on capital flows in both crisis and non-crisis situations.

Keywords:   exchange rate policy, capital flows, open economy, inflation, balance sheets, fixed exchange rates, flexible exchange rates, interest rates, investor confidence

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