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Dynamics of a Floating Exchange Rate Regime

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  • Helpman, Elhanan
  • Razin, Assaf

Abstract

We study the full equilibrium dynamics of a two-country world economy with a floating exchange rate, traded and nontraded goods, and explicit modeling of the use of money. The resulting exchange rate equation depends on several details of the economic structure, such as the supply structure and propensities to spend on various goods. Although real exchange rate movements have the usual association with the current account, the ordinary exchange rate may appreciate or depreciate when there are deficits on current account even when the quantities of money do not change. Deviations from purchasing-power parity and the Fisher equation are shown to be the rule rather than the exception.

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Bibliographic Info

Paper provided by Harvard University Department of Economics in its series Scholarly Articles with number 3445095.

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Date of creation: 1982
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Publication status: Published in Journal of Political Economy -Chicago-
Handle: RePEc:hrv:faseco:3445095

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  1. Alan C. Stockman, 1978. "A Theory of Exchange Rate Determination," UCLA Economics Working Papers, UCLA Department of Economics 122, UCLA Department of Economics.
  2. Calvo, Guillermo A & Rodriguez, Carlos Alfredo, 1977. "A Model of Exchange Rate Determination under Currency Substitution and Rational Expectations," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 85(3), pages 617-25, June.
  3. Liviatan, Nissan, 1981. "Monetary Expansion and Real Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 89(6), pages 1218-27, December.
  4. Boyer, Russell S, 1977. "Devaluation and Portfolio Balance," American Economic Review, American Economic Association, American Economic Association, vol. 67(2), pages 54-63, March.
  5. Dornbusch, Rudiger & Fischer, Stanley, 1980. "Exchange Rates and the Current Account," American Economic Review, American Economic Association, American Economic Association, vol. 70(5), pages 960-71, December.
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