NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Exchange Rate Flexibility and the Transmission of Business Cycles

Jorge Braga de Macedo, David M. Meerschwam

NBER Working Paper No. 1573
Issued in March 1985
NBER Program(s):International Trade and Investment, International Finance and Macroeconomics

This paper presents a very simple model of the effects of flexible exchange rates in the transmission of business cycles. The starting point is the traditional "locomotive" effect, through exports and imports. Aside from this horizontal transmission, the intertemporal exchange rate model presented here allows for the effect of future internal shocks on home income (horizontal transmission) as well as for the effect of future external shocks on home income (diagonal transmission). These channels highlight the role of flexible rates and follow from an intertemporal constraint on the trade balance. In the presence of foreign-held debt, furthermore, the locomotive effect can be reversed, so that a foreign boom can cause a recession at home. The determinants of the debt ceiling are derived. The model is simulated in the case of two symmetric countries with constant values for the policy variables and the interest rates at home and abroad.

download in pdf format
   (331 K)

download in djvu format
   (204 K)

email paper

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w1573

Users who downloaded this paper also downloaded* these:
Baxter and Stockman w2689 Business Cycles and the Exchange Rate System: Some International Evidence
Chari, Kehoe, and McGrattan w5876 Monetary Shocks and Real Exchange Rates in Sticky Price Models of International Business Cycles
Burger and Kolstad w15543 Voluntary Public Goods Provision, Coalition Formation, and Uncertainty
 
Publications
Activities
Meetings
NBER Videos
Themes
Data
People
About

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us