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Monetary Policy Under Exchange Rate Flexibility

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  • R. Dornbusch

Abstract

The continuing depreciation of the dollar stands out as one of the big policy issues. It has started to impinge on U.S. monetary policy; it influences the chances for international commercial diplomacy, and it is enhancing the move toward European monetary integration. Above all it leaves most observers with a puzzle as to the causes of the ongoing depreciation. This paper will, of course, not resolve the puzzle. ft rather attempts to layout the basic analytical framework that has been developed for the analysis of exchange-rate questions and to relate it to the question of monetary policy. Part I concentrates on the development of the relevant theoretical framework. The main points to be made here are: (i) exchange rates are primarily deter-mined in asset markets with expectations playing a dominant role; (ii) the sharpest formulation of exchange-rate theory is the "monetary approach, "Chicago's quantity theory of the open economy; (iii) purchasing power parity is a precarious reed on which to hang short-term exchange-rate theory; (iv) the current account has just made it back as a determinant of exchange rates

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Bibliographic Info

Paper provided by Massachusetts Institute of Technology (MIT), Department of Economics in its series Working papers with number 228.

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Date of creation: Jan 1979
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Handle: RePEc:mit:worpap:228

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Postal: MASSACHUSETTS INSTITUTE OF TECHNOLOGY (MIT), DEPARTMENT OF ECONOMICS, 50 MEMORIAL DRIVE CAMBRIDGE MASSACHUSETTS 02142 USA
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Cited by:
  1. Jacob A. Frenkel, 1980. "The Collapse of Purchasing Power Parities during the 1970s," NBER Working Papers 0569, National Bureau of Economic Research, Inc.
  2. Henriksson, Roy. & Lessard, Donald R., 1982. "The efficiency of the forward exchange market : a conditional nonparametric test of forecasting ability," Working papers 1337-82., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  3. Murray, John & Mark Zelmer & Zahir Antia, 2000. "International Financial Crises and Flexible Exchange Rates: Some Policy Lessons from Canada," Technical Reports 88, Bank of Canada.
  4. John Sarich, 2006. "What do we know about the real exchange rate? A classical cost of production story," Review of Political Economy, Taylor & Francis Journals, vol. 18(4), pages 469-496.
  5. Kumah, F.Y., 1996. "The Effect of Monetary Policy on Exchange Rates: How to Solve the Puzzles," Discussion Paper 1996-70, Tilburg University, Center for Economic Research.
  6. Keen, Peter G. W., 1979. "Information systems and organizational change," Working papers 1087-79. Report (Alfred P, Massachusetts Institute of Technology (MIT), Sloan School of Management.
  7. Richard K. Lyons, 1991. "Floating Exchange Rates in Peru, 1950-54," NBER Working Papers 3775, National Bureau of Economic Research, Inc.

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