The effects of monetary and fiscal policy for a small open economy with flexible exchange rates

The conventional view of the impact of monetary and fiscal policies on output for a small open economy with flexible exchange rates and capital mobility are derived from the papers of Mundell and Fleming (1960's). Some more recent models by Casas, Argy and Salop, and Sachs in the seventies and eighties have added new elements to the traditional Mundell-Fleming framework such as a labor market with a wage indexation structure, and the distinction between producer prices and consumer prices. In these newer models, in situations where real wages are fixed, the traditional Mundell-Fleming result of monetary policy being effective and fiscal policy being ineffective is reversed.;This dissertation has two primary tasks. One is to determine which countries of the world fit the common assumptions of these models since the Bretton Woods breakdown, and hence could be empirically estimated. Somewhat a surprise, the only country found to be totally applicable is found to be Canada during this flexible exchange rate period. The second task is to empirically estimate a discrete time version of a model similar to that used by Sachs. This is performed with inconclusive empirical results for Canada using quarterly data. Because of the nature of the estimation, it is suggested that estimation with annual data be performed when that becomes possible.