Exchange Rate Dynamics in a General Equilibrium Model with Decreasing Returns to Labor
AbstractWe develop an extension to the Obstfeld and Rogoff (1995, 1996) two sector model with imperfect competition and norminal wage rigidities. Contrary to the Obstfeld and Rogoff (1995, 1996) analysis, we assume that technology exhibits decreasing returns to scale. We analyze the implications for the exchange rate's reaction to an unexpected permanent rise in the money supply. The model replicates an overshooting result for certain parameter values, and we are able to isolate the effect of decreasing returns on the exchange rate. The exchange rate overshootes less compared to the situation in Obstfeld and Rogoff (1995, 1996), in which there is constant returns to scale.
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Bibliographic InfoPaper provided by University of Aarhus, Aarhus School of Business, Department of Business Studies in its series Finance Working Papers with number 00-12.
Length: 22 pages
Date of creation: 01 Aug 2000
Date of revision:
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Postal: The Aarhus School of Business, Fuglesangs Allé 4, DK-8210 Aarhus V, Denmark
Fax: + 45 86 15 19 43
Web page: http://www.asb.dk/about/departments/bs.aspx
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Monopolistic competition; Norminal rigidities; Exchange rates; Overshooting;
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