The choice of assigning monetary or fiscal policy to external balance is complicated when the authorities are concerned with both the current account balance and the exchange rate. A strategy of using monetary policy to control the current account via the exchange rate may fail, because the relative-price effect is likely to be offset by the effect of monetary policy on aggregate demand. An alternative strategy, in which fiscal policy is assigned to limit shifts in the current account while the exchange rate is not directly targeted, may have a better chance of having favorable effects on both variables.

The choice of assigning monetary or fiscal policy to external balance is complicated when the authorities are concerned with both the current account balance and the exchange rate. A strategy of using monetary policy to control the current account via the exchange rate may fail, because the relative-price effect is likely to be offset by the effect of monetary policy on aggregate demand. An alternative strategy, in which fiscal policy is assigned to limit shifts in the current account while the exchange rate is not directly targeted, may have a better chance of having favorable effects on both variables.

The determinants of current account imbalances under floating exchange rates are analyzed. The analysis provides a framework within which the sources of. and the remedies for, the current account imbalances between the United States, Japan, and the Federal Republic of Germany can be discussed. The effects of various government policies are emphasized, in particular the differences between expenditure-changing and expenditure-switching policies. Short-run and long-run considerations are investigated, as well as the role played by expectations and price-level dynamics.

The fiftieth anniversary of the Bretton Woods Conference served as an opportunity to reappraise the desirability of strengthening the IMF's oversight of the functioning of the international monetary system. Whatever the design of an exchange rate system and the arrangements for the provision of international liquidity, it is widely accepted that to be effective such oversight must rest on a strong analytic foundation. These two volumes, edited by Jacob A. Frenkel and Morris Goldstein, present 30 analytic papers on the system as it functioned during 1987-91 and aim at conveying the flavor of those issues that commanded close attention in the Fund's research program.

During his distinguished career at the IMF, Jacques J. Polak served as both Director of Research and, subsequently as a member of the IMF Executive Board. His distinct contribution to the discipline of international financial policy is highlighted in this book edited by Jacob A. Frenkel and Morris Goldstein. The papers included were prepared for a conference, cosponsored by the Netherlands Bank and the IMF, held in Polak's honor in Washington, D.C., in January 1991.

This book addresses the growing debate over proposals for international monetary reform and the tentative attempts, for example at the Louvre and Plaza accords, to achieve greater coordination of macroeconomic policies. The first section draws lessons from the experience of the interwar Gold Standard, the Bretton Woods system, and the EMS. Four papers examine theoretical issues underlying the design of coordinated economic policies. Contributors explore the use of commodity prices as indicators of inflationary pressures and analyze exchange rate target bands using concepts first developed in the financial literature. The final chapters present empirical evaluations of the performance of alternative exchange rate regimes, adding to the existing literature on the design of gains from coordinated economic policies. The contributors, drawn from academic and policy circles, include leading advocates of exchange rate target zones and 'disciplined floating'. This book is of interest to students of international macroeconomics and policy coordination and to all those who have followed the debate on the evolution of the international monetary system.