Synopsis

Abstract

First consider the stability of the long-run equilibrium in the open economy. For the basic model, the long-run equilibrium will be stable in any case. With endogenous exchange rate policy, this is somewhat different. Under a fixed exchange rate, the long-run equilibrium will be stable. But under a flexible exchange rate, endogenous exchange rate policy cannot be adopted. With endogenous monetary policy, it is the other way round. Under a fixed exchange rate, endogenous monetary policy cannot be implemented. But under a flexible exchange rate, the long-run equilibrium will be stable. For flexible money wages, the long-run equilibrium will be stable in any case. This holds for exogenous fiscal policy, too. With endogenous fiscal policy, this is quite different. Under a fixed exchange rate, the long-run equilibrium will be unstable. And under a flexible exchange rate, endogenous fiscal policy cannot be pursued. For a synopsis see table 28.