MACROECONOMIC POLICY AND THE EXCHANGE-RATE SYSTEM

Our analysis of business cycles and economic growth has generally focused on policies in’ a closed economy. W~ analyzed the way that- monetary and final policies can help stabilize the business cycle, shaving the. peaks off inflation and the troughs off output. How do macroeconomic policies change in an open economy? Surprisingly, the answer to this question depends crucially on whether the country has a fixed or flexible exchange rate.

Our survey here will concentrate on high-income . countries whose financial markets are closely linked together-s-including countries like the United States and  Canada, Britain, and Germany. When financial investments can flow easily among countries and the regulatory barriers to financial investments are low, we say that these countries have high mobility of financial capital.

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