TY  - JOUR
AU  - Stockman,Alan C.
AU  - Ohanian,Lee E.
TI  - Short-Run Independence of Monetary Policy Under Pegged Exchange Rates and Effects of Money on Exchange Rates and Interest Rates
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 4517
PY  - 1993
Y2  - November 1993
UR  - http://www.nber.org/papers/w4517
L1  - http://www.nber.org/papers/w4517.pdf
N1  - Author contact info:
Alan C. Stockman
Department of Economics
University of Rochester
Rochester, NY  14627-0156
Tel: 585/275-7214
Fax: 585/256-2309
E-Mail: N/A user is deceased

Lee E. Ohanian
8283 Bunche Hall
UCLA, Department of Economics
Box 951477
Los Angeles, CA  90095
Tel: 310/825-0979
Fax: 310/825-9528
E-Mail: ohanian@econ.ucla.edu
AB  - Economists generally assert that countries sacrifice monetary independence when they peg their exchange rates.  At the same time, central bankers frequently assert that pegging an exchange rate does not eliminate the independence of monetary policy.  This paper examines the effects of money-supply changes on exchange rates, interest rates, and production in an optimizing two-country model in which some sectors of the economy have predetermined nominal prices in the short run and other sectors have flexible prices.  Money-supply shocks have liquidity effects both within and across countries and induce a cross-country real-interest differential.  The model predicts that liquidity effects are highly non-linear and are not likely to be captured well empirically by linear models, particularly those involving only a single country.  The most striking implication of the model is that countries have a degree of short-run independence of monetary policy even under pegged exchange rates.
ER  -