Advanced Search
MyIDEAS: Login to save this article or follow this journal

When is money neutral under flexible exchange rates?

Contents:

Author Info

  • Ahtiala, Pekka
Registered author(s):

    Abstract

    The paper studies the conditions for the neutrality of money under flexible exchange rates in an extended real-wage Mundell-Fleming model, with special emphasis on the specification of the behavior functions to correspond to their foundations in closed-economy macrotheory. It is shown that monetary expansion causes output first to decline, to eventually rise above its original level. However, if interest earnings on foreign securities dominate the trade balance in the expression for the exchange rate, monetary expansion leads to an appreciation of the exchange rate, while having an expansionary output effect. Money is neutral in the long run if either the wealth effect or foreign interest payments are abstracted from; if both are abstracted from, it is neutral also in the short run. Short and long-run neutrality results also if wealth consists only of foreign securities. The above responses hold both for net creditors and - with a minor qualification - debtors.

    Download Info

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
    File URL: http://www.sciencedirect.com/science/article/B6W4V-4RX077S-1/2/a785c28c2343405f44ac136be0a1195b
    Download Restriction: Full text for ScienceDirect subscribers only

    As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

    Bibliographic Info

    Article provided by Elsevier in its journal International Review of Economics & Finance.

    Volume (Year): 18 (2009)
    Issue (Month): 2 (March)
    Pages: 318-326

    as in new window
    Handle: RePEc:eee:reveco:v:18:y:2009:i:2:p:318-326

    Contact details of provider:
    Web page: http://www.elsevier.com/locate/inca/620165

    Related research

    Keywords: Mundell-Fleming model Neutrality of money Flexible exchange rates;

    References

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
    as in new window
    1. Rudiger Dornbusch, 1988. "Real Exchange Rates and Macroeconomics: A Selective Survey," NBER Working Papers 2775, National Bureau of Economic Research, Inc.
    2. Sachs, Jeffrey, 1980. "Wages, Flexible Exchange Rates, and Macroeconomic Policy," The Quarterly Journal of Economics, MIT Press, vol. 94(4), pages 731-47, June.
    3. Victor Argy & Joanne Salop, 1979. "Price and Output Effects of Monetary and Fiscal Policy under Flexible Exchange Rates (Effets des politiques monétaire et budgétaire sur les prix et la production en régime de taux de change f," IMF Staff Papers, Palgrave Macmillan, vol. 26(2), pages 224-256, June.
    4. Alan P. Kirman, 1992. "Whom or What Does the Representative Individual Represent?," Journal of Economic Perspectives, American Economic Association, vol. 6(2), pages 117-136, Spring.
    5. Stephen M. Goldfeld, 1973. "The Demand for Money Revisited," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 4(3), pages 577-646.
    6. William H. Branson & Willem H. Buiter, 1982. "Monetary and Fiscal Policy with Flexible Exchange Rates," NBER Working Papers 0901, National Bureau of Economic Research, Inc.
    7. Obstfeld, Maurice & Rogoff, Kenneth, 1995. "Exchange Rate Dynamics Redux," Journal of Political Economy, University of Chicago Press, vol. 103(3), pages 624-60, June.
    8. Ahtiala, Pekka, 1998. "Monetary policy under flexible exchange rates: When is expansion contractionary?," International Review of Economics & Finance, Elsevier, vol. 7(4), pages 361-378.
    9. Steven D. Levitt & John A. List, 2007. "What Do Laboratory Experiments Measuring Social Preferences Reveal About the Real World?," Journal of Economic Perspectives, American Economic Association, vol. 21(2), pages 153-174, Spring.
    10. Krugman, Paul & Taylor, Lance, 1978. "Contractionary effects of devaluation," Journal of International Economics, Elsevier, vol. 8(3), pages 445-456, August.
    11. Dornbusch, Rudiger & Fischer, Stanley, 1980. "Exchange Rates and the Current Account," American Economic Review, American Economic Association, vol. 70(5), pages 960-71, December.
    12. Ahtiala, Pekka, 1987. "The effects of foreign disturbances under flexible exchange rates," Journal of International Money and Finance, Elsevier, vol. 6(4), pages 387-400, December.
    13. Dornbusch, Rudiger, 1975. "A portfolio balance model of the open economy," Journal of Monetary Economics, Elsevier, vol. 1(1), pages 3-20, January.
    14. George A. Akerlof, 2007. "The Missing Motivation in Macroeconomics," American Economic Review, American Economic Association, vol. 97(1), pages 5-36, March.
    15. Ahtiala, Pekka, 1984. "A synthesis of the macroeconomic approaches to exchange rate determination," European Economic Review, Elsevier, vol. 24(2), pages 117-136, March.
    Full references (including those not matched with items on IDEAS)

    Citations

    Lists

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    Statistics

    Access and download statistics

    Corrections

    When requesting a correction, please mention this item's handle: RePEc:eee:reveco:v:18:y:2009:i:2:p:318-326. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei).

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.