And countries that offer high prospective returns but have weak policy frameworks or other structural vulnerabilities may be particularly sensitive to fluctuations in international investment associated with global risk factors. 7  3  For a discussion of the effect of Federal Reserve actions on international economic conditions, see Rey (2015). 4  See Hume (1742). 5  See Mundell (1963) and Fleming (1962).
One key implication of the Mundell-Fleming framework is that a central bank can exercise full control over both the exchange rate and the domestic interest rate only when there are significant barriers to the international capital mobility.