No abstract

No abstract

No abstract

JUST AS EVERYBODY TALKS ABOUT the weather, every economist talks about endogenous stabilization policy, but nobody ever does anything about it. In recent years, the authors of numerous econometric studies of fiscal and monetary policy have warned that the policy variables that they treat as exogenous should perhaps be treated as endogenous if the stabilization authorities were pursuing an active countercyclical policy during the period in question. Typically, the warning is the last word on the subject; and so far as we know, no efforts have been made to investigate the kinds of difficulties this omission may cause. The idea that the typical stabilization policy variables-federal government purchases of goods and services, income tax rates, the monetary base (or unborrowed reserves), the Federal Reserve's discount rate, and so onshould perhaps be treated as endogenous in econometric studies raises a host of issues for the estimation and use of macro models. In this paper we hope to say something to three groups who are interested in the econometric approach to monetary and fiscal policies. * We wish to thank our colleagues Gregory C. Chow and Dwight M. Jaffee for helpful comments; Joshua Greene, John Ortiz, and Barry Schwartz for research assistance; and Ms. Betty Kaminski for quality typing under duress.

national financial capital flows-movements of nondirect investment items in the capital account-related capitalfiows to levels of interest differentials. According to this "flow theory," an increase in foreign short-term interest rates would increase the outflow of capital from the United States, and as long as foreign interest rates remained higher than American rates, the flow would continue. Conversely, one way for the United States to improve its balance on capital account would be to raise its rates, and as long as U.S. rates remained higher than foreign rates, the capital account would show a reduced deficit. This relationship of capital flows to levels of interest rates was rather widely accepted in the mid-1960s by both theorists and empiricists in international economics. For example, the famous articles by Robert A. Mundell on the simultaneous maintenance of external and internal balance generally assumed the relationship: ".. . at high rates of interest the net inflow of capital will be larger, or the net outflow will be smaller, than at low rates of interest."' In a well-known study, Peter B. Kenen also cor-235 * I wish to acknowledge, in addition to assistance from participants in the Brookings panel, the comments of Burton Malkiel, assistance from Raymond D. Hill in all aspects of preparation, and support from National Science Foundation Research Grant Number GS, 1972.

No abstract

No abstract

No abstract