New Cambridge Macroeconomics, Assignment Rules and Interdependence
A new theory of macroeconomic management has been evolving in Cambridge, England in the last several years. A central implication of this theory is that fiscal policy should be directed at the balance of payments target and the exchange rate at the employment target.1 This theory overturns the conventional wisdom. It has generated considerable excitement, even though there is no fully articulated exposition of the new theory.2 The excitement has become greater since the change of government in Britain in March 1974, because it is believed that the exponents of the new theory now hold the ear of the Chancellor of the Exchequer. This paper examines the theory in the context of the ‘assignment’ problem and then looks at the implications for the political economy of international relations.
KeywordsExchange Rate Central Bank Home Country Fiscal Policy Government Expenditure
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