Handbook on the History of Economic Analysis Volume III
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Handbook on the History of Economic Analysis Volume III

Developments in Major Fields of Economics

Edited by Gilbert Faccarello and Heinz D. Kurz

Volume III contains entries on the development of major fields in economics from the inception of systematic analysis until modern times. The reader is provided with succinct summary accounts of the main problems, the methods used to address them and the results obtained across time. The emphasis is on both the continuity and the major changes that have occurred in the economic analysis of problematic issues such as economic growth, income distribution, employment, inflation, business cycles and financial instability. Each Handbook can be read individually and acts as a self-contained volume in its own right. It can be purchased separately or as part of a three-volume set.
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Chapter 30: Open economy macroeconomics

Joern Kleinert


One line of thinking leading to the research field of international macroeconomics has been brought forward or at least initiated by John Maynard Keynes’s theoretical work on war finance, on how the Bretton Woods/General Agreement on Tariffs and Trade (GATT) system might work, and on Britain’s post-war loans (Vines 2003). In his work, Keynes laid the fundaments to and in many ways preceded the work of Mundell (1963) and Fleming (1962) and that of later studies on financial crises. He thereby used his earlier work published in the Treatise on Money (Keynes 1930) which he combined with the demand management from the General Theory (Keynes 1936). In his studies on war finance, Keynes has worked with an IS–LM–BP model in mind in a small open economy version and a two-country version. Yet, the open economy Keynesian model that we have been using had to wait until the 1960s to become popular and widely used (Vines 2003). Open economy macroeconomics had been worked on and popularized particularly by the International Monetary Fund (IMF) where Mundell and Fleming worked in the Research Department which was headed by Polack at the beginning of the 1960s. Fleming’s Keynesian tradition met Mundells view which had also been shaped by other influences: Meade’s mathematical approach (Meade 1951), the discussion with Metzler on conditions of general equilibrium in an open economy (see Mundell 1961) and Samuelson’s stability analysis (Samuelson 1947) have been important in developing Mundell’s approach to the analysis of Open Economy Macroeconomics (Young and Darity 2004). Mundell looked for a way to analyse the difference between an economy with a fixed exchange rate and flexible prices and an economy with flexible exchange rates and fixed prices in a model with full-employment.

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