Abstract
This paper extends Mundell's analysis of monetary policy under flexible exchange rates with capital mobility to the case that exchange rate expectations are formed adaptively. And the main results are as follows.
(i) The expansion of domestic output is smaller in adaptive expectations case than in Munell's static expectations case, and further, the expansionary effect of monetary policy decreases in proportion as the elasticity of expectations decreases.
(ii) The direction of change in foreign output depends on the elasticity of expectations.
