DP247 Wealth Targets, Exchange Rate Targets and Macroeconomic Policy

Author(s): Andrew P Blake, David Vines, Martin Weale
Publication Date: May 1988
Keyword(s): Exchange Rates, Fiscal Policy, Macroeconomic Policy, National Wealth, Wage Indexation
JEL(s): 023, 311, 321, 431, 822
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=247

This paper argues that a wealth target is an important feature of an economic policy package. A real exchange rate target can be used as an intermediate target to steer national wealth towards its desired value. Such a policy requires that fiscal policy be used to restrain inflation. This may be difficult if there is real wage resistance. In this instance, fiscal policy must be used to maintain national wealth, with monetary policy being used to restrain inflation. In this case also, monetary policy can be implemented by means of an exchange rate target. These arguments are demonstrated algebraically and then illustrated using policy rules designed for use on a model of the United Kingdom economy.