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Professor Rødseth provides a broad survey of open economy macroeconomics within a unified framework. This upper-level textbook reviews the theories employed by ministries of finance, central banks and financial institutions which form the basis for most quantitative models of open economies. It also points out the limitations of these theories and gives an update on recent research. The emphasis is on how the nature of the markets for foreign exchange and for exports and imports sets the stage for government policy and determines the macroeconomic effects of external and internal shocks. Particular attention is paid to the relations between short- and long-run equilibria and the long-run consequences of national policies. Short-run wage rigidities play a key role, and models with wage bargaining are compared to more traditional formulations. Exchange rate policy and the transmission of shocks are discussed both from a national and an international perspective

The focus is on the interaction between demand and supply in a small open economy, featuring the dynamics of money wages, private capital, public debtand foreign assets. A macroeconomic shock induces an extended process of adjustment that is characterized by unemployment. This in turn requires a dynamic path of monetary and fiscal policy. As a response to the shock, the central bank continuously adapts the quantity of money so as to keep up full employment all the time. And the government continuously accommodates its purchases of goods and services. Can this be sustained? Or will public and foreign debt tend to explode, thereby squeezing private capital down to zero? As a finding, the answer depends on the government budget constraint, the exchange rate regime, the size of the foreign interest rate, the flexibility of money wages and other factors. The present monograph consists of two major parts, flexible exchange rates (part I) and fixed exchange rates (part II). Each part in turn is composed of two chapters, the basic model (chapter I) and the economy with public sector (chapter II)

The integration of market economies is one of the most remarkable features of international economics, which has important implications for macroeconomic performance in open economies. Equally important is the declining relevance of the real versus the monetary theory dichotomy. These papers focus on those aspects of monetary policy which relate to credibility and non-neutrality; the domestic adjustment to foreign shocks; the interdependence of open economies and their strategic interactions. An important section is also devoted to the innovative modelling of exchange rate dynamics.

This paper explores the properties of an open economy model in which real exchange rate overshooting has a permanent impact on the rate of unemployment via a hysteresis mechanism. The magnitude of this effect depends on the slope of the short‐run Phillips curve, the speed with which expectations adjust in the labour market, and on the speed with which capacity adjusts to changes in capacity utilisation. However, it does not depend on how open the economy is, although the dynamics of the adjustment process (including the extent of the initial jump in the exchange rate following a change in monetary policy) do depend on this factor.

The financial markets have turned open-economy monetary economics on its head. This book explains the implications of these developments for theory and policy in the practices of the 1980s and 1990s, aiming to escape from the Keynsesian modes of thought and expression.