Japanese Macroeconomic Policy and the Current Account Under Alternative International Monetary Regimes

Empirical estimates of the effect of monetary and fiscal policy on the Japanese current account are provided. To assess the quantitative importance of international monetary factors, these estimates are computed under three different exchange rate regimes: flexible exchange rates, fixed exchange rates with a "yen standard" and fixed exchange rates with a "multi-currency standard." For all exchange rate regimes, monetary policy has a much smaller impact on the current account than fiscal policy, but the impact of fiscal policy on the current account is even larger when exchange rates are fixed than when exchange rates are flexible. The estimates are based on a quarterly multicountry econometric model with rational expectations estimated during the 1972-1986 period.