International Macroeconomics: Theory, Policy and Applications PDF
Preview International Macroeconomics: Theory, Policy and Applications
INTERNATIONAL MACROECONOMICS By th~ sam~ author THE INTERNATIONAL MONETARY SYSTEM AND THE LESS DEVELOPED COUNTRIES THE QUEST FOR ECONOMIC STABILISATION: The IMF and lilt Third World (wilh Tony Killick. ltnniftr Sharplty and Mary SUllon) WORLD FINANCE AND ADJUSTMENT: An Agenda for Reform INTERNATIONAL FINANCIAL POLICY AND ECONOMIC DEVELOPMENT: A Disaggregaled Approach International Macroeconomics Theory, Policy and Applications Graham Bird Professor of Economics University of Surrey palgrave * <0 Graham Bird 1987 All rights reserved. No reproduction, copy or transmission of this publication may be made without written permission. No paragraph of this publication may be reproduced, copied or transmitted save with written permission or in accordance with the provisions of the Copyright, Designs and Patents Act 1988, or under the terms of any licence permitting limited copying issued by the Copyright licensing Agency, 90 Tottenham Court Road, london W1 P OlP. Any person who does any unauthorised act in relation to this publication may be liable to criminal prosecution and civil claims for damages. The author has asserted his right to be identified as the author of this work in accordance with the Copyright, Designs and Patents Act 1988. Published by PAlGRAVE Houndmills, Basingstoke, Hampshire RG21 6XS and 175 Fifth Avenue, New York. N.Y. 10010 Companies and representatives throughout the world PAlGRAVE is the new global academic imprint of St. Martin's Press llC Scholarly and Reference Division and Palgrave Publishers ltd (formerly Macmillan Press ltd). ISBN 978-0-333-44411-5 ISBN 978-1-137-09829-0 (eBook) DOl 10.1007/978-1-137-09829-0 This book is printed on paper suitable for recycling and made from fully managed and sustained forest sources. A catalogue record for this book is available from the British library. Transferred to digital printing 2001 To my family Contents Preface and Ack.nowledgements 1 Introduction Part I Theory 5 2 An Open-Economy Macroeconomic Model 7 3 Trade Functions and Capital Movements 24 4 Balance of Payments Theory 35 5 Theories of Exchange-Rate Determination 49 Part II Policy 67 6 Stabilisation Policy in an Open Economy 69 7 Exchange-Rate Management and Policy 97 8 Global Macroeconomic Management 113 Part III Applications 125 9 United States Domestic Macroeconomic Policies, Dollar Overvaluation, and their Effects on the US Economy and the Rest of the World 127 10 The International Monetary Fund and Stabilisation Policy in Small Open Economies 139 11 The European Monetary System and the United Kingdom 151 12 The Global Macroeconomic Effects of Changing Oil Prices 159 NOles and References 167 Further Reading 176 Index 182 vn Preface and Acknowledgements This book is loosely based on lecture courses given at the University of Surrey in the United Kingdom and the Fletcher School of Law and Diplomacy, Tufts University, in the USA. It is designed to be used essentially as a text for an introductory one-term or one-semester undergraduate course in open-economy and world-economy macro economics. It is written for people who prefer to avoid. where possible, mathematical and algebraic formulations. The book is relatively short and the arguments ofl en terse. While readers are not faced by reading a weighty tome, therefore. they will have to concen trate quite hard on what they do read, and 10 think through the logic. A number of people have helped with the preparation of this book. The following have offered constructive advice on certain chapters at different stages in their production; Heather Bird. Tony Killick. Paul Stevens, Tony Thirlwall and John Williamson. In particular. Victor Argy kindly commented in considerable detail on some of the chap ters. The typing and general organisation of the manuscript has been undertaken by Julie Alcock and Liz Blakeway in a manner typical of their friendly and efficient approach to all aspects of their jobs. I am very grateful to them all. The opportunity to teach open-economy macroeconomics in the USA resulted from an invitation to spend a year as Visiting Professor of International Economic Affairs at the Fletcher School. I am indebted to Benjamin J. Cohen for organising this. and for the chance it created for me to exchange views with him on many of the matters raised in this book. Thanks are also owed to the Institute for International Economic Studies in Stockholm for offering me hospitality as a Visiting Scholar in the spring of 1986. Apart from providing a stimulating environ ment in which to work. the visit also allowed me to escape the rigours of being an Acting Head of a University Department for a few weeks and to write early drafts of a number of the chapters contained here. The Economic and Social Research Council financed the visit and 1 am therefore most grateful to them as well. Last but by no means leasti must acknowledge the ongoing debt I owe to my family, my wife Heather and my children. Alan, Anne and ix , Preface and Acknowledgements Simon. They work on the basis that income is in fact a function of consumption and thereby provide the necessary and pressing incen tive to keep writing. It is thus not entirely for reasons of intellectual pride that I hope this book finds a ready. and preferably large, market. Guildford. Surrey GRAHAM BIRD 1 Introduction This book attempts to provide a non-mathematical introduction to the macroeconomic analysis of both the open economy and the world economy. Such analysis is appropriate for a number of reasons. First, all economies are, at least to some extent. open; they have trading and financial links with other economies. Second. what holds for a closed economy may not hold for an open one. Dropping the closed economy assumption from simple macroeconomic models is a strategic step which may even reverse the policy conclusions reached. Third, while it is important to see how the operation of an open economy differs from that of a closed one. it is also important 10 examine the operation of the world economy - or a substantial part of it - as a whole. Many macroeconomic problems are shared across countries and it is therefore relevant to ask whether these problems and their potential solutions should not be dealt with at a more aggregated level than that of individual countries. Furthermore. does it follow that what is right for an individual economy in isolation is right for the world economy? Of course, none of this is very new. A great deal has been written over recent years - and indeed not so recent years - about open· economy macroeconomics. although perhaps rather less has been written on the macroeconomics of the world economy. Much of l what has been produced. however, has been quite mathematical and technical. Yet the issues raised are sufficiently important to warrant dissemination to and discussion by a wider audience which. while it may be happy to look at diagrams and to follow some elementary analysis, feels uncomfortable with too many formulae and equations. The purpose of this book is to provide just such an exposition. Of course, the simplification of theory has costs as well as benefits. The principal cost is a loss of analytical precision and rigour. although there can be legitimate debate over just how high a cost this is. The book's purpose is not only to work through a certain amount of economic theory, but also to relate the theory to problems of macroeconomic management and policy formulation at both the individual and world-economy level. Theory is then not presented for its own sake, but rather as a means of assisting in the realisation of basic macroeconomic policy targets. As such, it is hoped that the
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