International Capital Flows, Exchange Rates and Macroeconomic Policy

Melbourne Institute Working Paper No. 24/99

Date: November 1999


Don Harding


The failure of the 'one size fits all' policy response to the Asian economic crisis initially favored by the IMF provides timely evidence of the institutional and country specific nature of macroeconomic policy. Thus, each economy needs to choose the broad macroeconomic policy regime that is best suited to its particular circumstances. There are significant constraints on the broad macroeconomic policy regimes that are feasible. Most notably a country cannot simultaneously achieve an independent monetary policy, exchange rate stability and complete financial market integration. It can partly achieve a convex combination of these objectives or fully achieve two of the objectives. A well-developed capacity for quantitative macroeconomic analysis is required if countries are to make a well-informed choice of regime while meeting the constraints just cited. Such a capacity is also required to determine the appropriate policy settings one a regime is chosen. In this paper I present a non-technical discussion of these issues, present some tentative policy conclusions and canvas the macroeconomic issues that might occupy research agendas of Asia Pacific regional research institutes seeking to build a capacity for macroeconomic analysis.

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