Capital Flows and International Adjustment

Abstract

As soon as we allow for international financial transactions, we can no longer treat monetary and fiscal policy as substitutes with respect to their short-run impact on output and employment. In this chapter we shall examine the implications of such capital flows between countries under fixed and flexible exchange-rate systems. The procedure adopted in most of the literature has been to modify the standard Keynesian macro-economic model. Notable here is the work of Mundell [62]. Related articles by Johnson [35], Ingram [30, 31], McKenzie [47] and Krueger [43] are also worth the reader’s attention.