ABSTRACT
Third, the focus on how macroeconomic policy takes effect through the exchange rate helps clarify some observed anomalies of the ACM world. If an American administration in the BCM world had pursued fiscal expansion and monetary stringency, the result might well have been that the policies canceled each other out: tight money would have reinforced the “crowding out” effects of the fiscal expansion. As it was, however, in the ACM world, the ReaganVolcker fiscal expansion and monetary stringency of the early 1980s had a markedly different impact. Fiscal policy was largely financed by foreign borrowing, which reduced or eliminated the effects of crowding out and contributed to appreciation of the dollar. At the same time, tight money reinforced the rise of the dollar by strengthening the international investment attractiveness of dollar-denominated securities. The result was striking both on macroeconomic grounds, as the dollar soared and the United States became a major net debtor to the rest of the world, and on distributional grounds, as the dollar appreciation devastated U.S. producers of tradable goods (manufactur ing and agriculture) and favored producers of nontradable goods and services (real estate, health care, leisure activities, and education).
