World Economics - Insight , Analysis and Data

World Economics - Insight , Analysis and Data
Macroeconomic Policy in Open Economies
Graham Bird & Graham Bird
World Economics, September 2014

The dilemma facing policymakers is how to combine the instruments they have available in the form of fiscal, monetary and exchange rate policy to achieve the targets of internal and external balance. Shortly before the global economic and financial crisis in 2008 most economies appeared to be close to internal balance, but many of them deviated from external balance either in the form of large current account deficits or surpluses. In the aftermath of the crisis and for most advanced economies there was a sharp departure from internal balance, and policymakers in these countries faced a daunting challenge to restore it. The challenge was much less severe for many emerging economies. This article examines whether the analytical framework devised by Meade, Mundell and Fleming in the 1950s and 1960s provides a suitable basis for describing and evaluating the options open to them. It also uses this framework to examine and briefly assess the strategies pursued by the US, China and Greece, and to explain why economists continue to disagree on what policies are appropriate.

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