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The Theory of Flexible Exchange Rate Regimes and Macroeconomic Policy

In: Flexible Exchange Rates and Stabilization Policy

Author

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  • Rudiger Dornbusch

    (Massachusetts Institute of Technology)

Abstract

This paper develops three perspectives on the determination of exchange rates and their interaction with macroeconomic equilibrium and aggregate policies. A long- run view characterizes exchange rate determination in terms of monetary and real factors where the real aspects include an explicit consideration of relative price structures. A short-run or “liquidity” view of the exchange rate emphasizes the role of asset market equilibrium and expectations. A policy view, finally, analyses the effectiveness of aggregate policies and points out that in the short-run nominal disturbances will tend to be transmitted internationally. The paper concludes with an analysis of dual exchange rate systems as a stabilizing policy in the presence of speculative disturbances.

Suggested Citation

  • Rudiger Dornbusch, 1977. "The Theory of Flexible Exchange Rate Regimes and Macroeconomic Policy," Palgrave Macmillan Books, in: Jan Herin & Assar Lindbeck & Johan Myhrman (ed.), Flexible Exchange Rates and Stabilization Policy, pages 123-143, Palgrave Macmillan.
    • Handle: RePEc:pal:palchp:978-1-349-03359-1_11
    DOI: 10.1007/978-1-349-03359-1_11
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    Cited by:

    1. De Melo, Jaime, 1988. "CGE models for the analysis of trade policy in developing countries," Policy Research Working Paper Series 3, The World Bank.
    2. Georg Rich, 1980. "Direktinvestitionen und Wechselkurs," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 116(III), pages 339-356, September.
    3. Alan G. Futerman, 2021. "Passive money system and control of exchange rates: The case of Argentina 1976–1981," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(4), pages 5512-5530, October.
    4. John F. Helliwell & Paul M. Boothe & Jozef Vuchelen, 1983. "Macroeconomic Implications of Alternative Exchange-Rate Models," Palgrave Macmillan Books, in: Paul Grauwe & Theo Peeters (ed.), Exchange Rates in Multicountry Econometric Models, chapter 2, pages 21-57, Palgrave Macmillan.
    5. Sebastian Edwards, 1981. "Floating Excahnge Rates, Exectations and New Information," UCLA Economics Working Papers 227, UCLA Department of Economics.
    6. Jack L. Carr & John E. Floyd, 2001. "Real and Monetary Shocks to the Canadian Dollar: Do Canada and the U.S Form an Optimal Currency Area?," Working Papers floyd-01-02, University of Toronto, Department of Economics.
    7. Edwards, Sebastian, 1983. "Floating exchange rates, expectations and new information," Journal of Monetary Economics, Elsevier, vol. 11(3), pages 321-336.

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