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Short-Run and Long-Run Dynamics of Exchange Rates with Sticky Prices

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  • Park, Gonyung

Abstract

This paper constructs microfoundations for the nexus between sticky goods prices and exchange rate overshooting. Based on an asset-pricing model, this paper describes how the exchange rate responds to a monetary shock in the short run and adjusts in later periods to a new long-run rate. In an environment where goods prices are sticky, the short-run response of the exchange rate to a monetary shock depends on the elasticity of consumption demand. The long-run exchange always shifts, equiproportionately to a monetary shock regardless of the parameter values and is reached many periods after the shock. Copyright 1997 by Blackwell Publishing Ltd.

Suggested Citation

  • Park, Gonyung, 1997. "Short-Run and Long-Run Dynamics of Exchange Rates with Sticky Prices," Review of International Economics, Wiley Blackwell, vol. 5(4), pages 478-491, November.
    • Handle: RePEc:bla:reviec:v:5:y:1997:i:4:p:478-91
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    Cited by:

    1. Bahmani-Oskooee, Mohsen & Kara, Orhan, 2000. "Exchange rate overshooting in Turkey," Economics Letters, Elsevier, vol. 68(1), pages 89-93, July.
    2. Gonyung Park & Young-yong Kim, 2003. "An empirical analysis of nominal rigidities and exchange rate overshooting: an intertemporal approach," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 8(2), pages 153-166.

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