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Does economic theory suggest that monetary and fiscal policy play different roles in causing big exchange rate movements?
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EC201 Assessment Two Question: Does economic theory suggest that monetary and fiscal policy play different roles in causing big exchange rate movements? Discuss the extent to which examples of big exchange rate movements in recent history can be attributed to monetary and fiscal policy changes. In 1950s proponents of flexible exchange rates had assumed that flexible exchange rates would move relatively slowly and smoothly. But within a few years of the disintegration of the Bretton Woods arrangements, that assumption had been shown to be misplaced: there were large and sometimes rapid changes in exchange rates. Are there any suggestive theories behind the observed large fluctuations? The aim of this essay is to demonstrate the different roles that monetary and fiscal policy has played in causing big exchange rates movements and the empirical evidence in recent currency experience. The basic Mundell-Fleming model in 1960s is essentially intact as a way of...
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