ABSTRACT
Discussion of macroeconomic policy in an open economy often assigns a crucial role to the current account balance. This chapter surveys the issue of how exogenous factors, in particular, macro policy settings, affect the current account and other macro variables in a floating rate system. This will be followed up in Chapter 8 with a discussion of whether it is ever appropriate to use macroeconomic policy to control the size of the current account balance. Apart from conventional macroeconomic questions about the effects of monetary, fiscal and wage policy on output, prices and the current account, the present chapter also treats additional topics arising from the use of the predictions of the model to examine policy problems. For instance, governments often apply monetary restraint to reduce a current account deficit, but the models studied can imply that this will increase the deficit. Another issue is what is meant in a floating rate regime by the commonly held notion that devaluation is expansionary?
