Abstract
Abstract On the basis of a theoretical model, Robert Mundell has shown that the effectiveness of monetary policy in an open economy depends on the nature of the exchange-rate system and on the freedom of, or restrictions on, international capital movements. He has shown that, in a situation of free capital movements and fixed exchange rates, monetary policy has less impact on domestic growth and employment than on the external position: the capital and the current account. Fiscal policy, on the other hand, is relatively effective in stabilizing the domestic business cycle. He concluded from this that, given fixed exchange rates, monetary policy should concentrate exclusively on establishing external equilibrium—or another desired balance of payments situation—while
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