RDP 1978-01: Two Essays in Monetary Economics 6. Concluding Comments

In conclusion, it is interesting to note that although much of the stimulus for recent work in monetary economics has come from consideration of the fixed exchange rate small open economy case, the insights into the mechanisms by which monetary disequilibrium influence the economy apply equally to the closed economy case or to the open economy with a flexible exchange rate regime. In the large closed economy, with a high proportion of its goods and assets not traded in world markets, domestic monetary stimulus will influence domestic prices and output relatively more than the balance of payments. Consequently, the canals by which monetary stimulus flows to the rest of the world will be mainly direct price effects rather than the monetary effects acting through the balance of payments which were emphasized by Hume. Conversely, the small open economy will find that domestic monetary disequilibrium will mainly affect its balance of payments in the longer run, although there are important domestic affects in the short run.