ct a great deal more than just the fundamentals of a particular country. Countries cannot afford to have key policy variables that are inconsistent with global trends. Thus the capital account's openness exposes the economy to pressures that may complicate achievement of the country's long-term real sector objectives, and stabilization issues must be more finely balanced against growth objectives. Integration into capital markets has its price. p> To be more realistic in these models, one can admit leakage's and other factor-such as unemployed resources, market imperfections, and expectations-that may mintage or enhance the basic impacts described above. Introducing greater sophistication increases the complexity and number of variables that must be considered in reaching any conclusion, but it does not make reaching a conclusion any easier. In fact, the results can be less determinant. The amount of unemployment in the economy affects the extent to which changes in aggregate demand move output or prices. In developing economies with limited factor mobility among sectors, the question of unemployed resources may have to be considered on a sectoral as well as an aggregate level, or by skill level. Depending on the particular model used, the inclusion of expectation function private investors will apply to any government action or nonaction. In some cases, where governments have announced a commitment to protect exchange rates or fix interest rates, guesswork is reduced for the market, but possibly at the cost of offering privat speculative investors a largely covered bet. In other cases it is much harder to predict whether a policy course outlined by a government will be seen as credible. In factor in a policy's effectiveness. The history of government commitment and the market's estimation of the resources the government has available to defend a position figure into this equation. Although models provide useful general guidance and help frame the issues, their implementation must be tempered by an analysis of the features of practical considerations.
The basic dilemma stems from the role of the exchange rate (nominal for-term transactions and real for long-term decisions) in equilibrating both goods and capital markets as they become more open. Heretofore, developing countries in East Asia and elsewhere have been able to use the level and movement of the exchange rate to effect the goods market almost exclusively. East Asian countries have often used nominal deprecations to maintain stable or slightly falling real exchange rates and so promote exports.
As capital markets open capital flows can create pressures to appreciate the real or nominal exchange rate against targets directed toward the goods market. Attempts to maintain a rate satisfactory for the goods market without adjusting other policy instruments can lead to disruptive capital flows. Either the exchange rate target has to be modif...
