Monetary and Fiscal Policy with Flexible Exchange Rates

William H. Branson, Willem H. Buiter

NBER Working Paper No. 901 (Also Reprint No. r0386)
Issued in June 1982
NBER Program(s):International Trade and Investment, International Finance and Macroeconomics

If price decisions are taken neither continuously nor in perfect synchronization, the process of adjustment of all prices to a new nominal level will imply temporary movements in relative prices. It might then well be that, to avoid these movements in relative prices, each price setter will want to move his own price slowly compared to others. The result will be a slow movement of all prices to their new nominal level, and substantial inertia of the price level. This paper formalizes this intuitive argument and reaches four main conclusions: (1) Even small departures from perfect synchronization can generate substantial price level inertia. (2) If price decisions are desynchronized, even anticipated movements in money will usually have an effect on economic activity. It is however possible to find paths of money deceleration which reduce inflation at no cost in output. (3) Price desynchronization has implications for relative price movements as well as for the price level. Goods early in the chain of production have more price and profit variability than goods further down the chain. (4) Price inertia, if it is due to price desynchronization, may be difficult to remove. It may well be that, given the timing decisions of others, no agent has an incentive to change his own timing decision: the time structure of price desynchronization may be stable.

download in pdf format
   (428 K)

email paper

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w0901

Published: Branson, William H. and Willem H. Buiter. "Monetary and Fiscal Policy with Flexible Exchange Rates." Economic Interdependence and Flexible Exchange Rates, ed. J.S. Bhandari and B.H. Putnam, pp. 251-285. Cambridge: Massachusetts Institute of Technology Press, 1983.

Users who downloaded this paper also downloaded* these:
Frenkel and Mussa w0575 Monetary and Fiscal Policies in an Open Economy
Mussa The Theory of Exchange Rate Determination
Dornbusch and Fischer The Open Economy: Implications for Monetary and Fiscal Policy
Dornbusch w0311 Monetary Policy Under Exchange Rate Flexibility
Sachs and Wyplosz w1255 Real Exchange Rate Effects of Fiscal Policy
NBER Videos

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

Contact Us