Document Type

Report

Publication Date

1-1976

Number

27

Abstract

Central to the determination of the proper assignment of monetary and fiscal policy is the precise nature of the role of international capital movements. Mundell's choice of assignments was based on his assumption that capital movements represent sustainable flows, whereas recent work in portfolio theory has shown that the demand for assets is a stock demand. Numerous papers have criticized Mundell for his specification of the capital flow equation and, instead, argued that a change in the rate of return on an asset will lead to a permanent change in desired asset stocks which can be accommodated by temporary asset flows.