NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Exchange Rate Dynamics With Sluggish Prices Under Alternative Price-Adjustment Rules

Maurice Obstfeld, Kenneth Rogoff

NBER Working Paper No. 1173 (Also Reprint No. r0555)
Issued in August 1983
NBER Program(s):   ITI   IFM

This paper studies exchange rate behavior in models with moving long-run equilibria incorporating alternative price-adjustment mechanisms.The paper demonstrates that price-adjustment rules proposed by Mussa andby Barro and Grossman yield models that are empirically indistinguishable from each other. For speeds of goods-market adjustment that are "too fast," the Barro-Grossman rule appears to induce instability; but we argue that when the ruleis interpreted properly, models incorporating it are dynamically stable regardless of the speed at which disequilibriumis eliminated. The Barro-Grossman pricing scheme is shown to be a natural generalization, to a setting of moving long-run equilibria, of less versatile schemes proposed in earlier literature on exchange rate dynamics.

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Document Object Identifier (DOI): 10.3386/w1173

Published: Obstfeld, Maurice & Rogoff, Kenneth, 1984. "Exchange Rate Dynamics with Sluggish Prices under Alternative Price-Adjustment Rules," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 25(1), pages 159-74, February. citation courtesy of

 
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