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Domestic and Foreign Disturbances in an Optimizing Model of Exchange- Rate Determination

Stephen J. Turnovsky

NBER Working Paper No. 1407 (Also Reprint No. r0648)
Issued in July 1984
NBER Program(s):International Trade and Investment, International Finance and Macroeconomics

This paper analyzes the effects of various disturbances of domestic and foreign origin in a small open economy under imperfect capital mobility in which the behavioral relationships are derived from optimization by the private sector. In this model the domestic economy jumps instantaneously to its new equilibrium following a change in either the domestic monetary growth rate or domestic fiscal policy. In response to a disturbance in either the foreign interest rate or inflation rate,the economy undergoes an initial partial jump towards its new equilibrium,which it there after approaches gradually. The implications of these results for exchange rate adjustment and the insulation properties of flexible exchange rates are discussed.

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Document Object Identifier (DOI): 10.3386/w1407

Published: Journal of International Money and Finance, Vol. 4, No. 1, pp. 151-171,(1985). citation courtesy of

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