Previous equilibrium "business cycle" models are extended by the incorporation of an economy-wide capital market. One aspect of this ex-tension is that the relative price that appears in commodity supply and demand functions becomes an anticipated real rate of return on earning assets, rather than a ratio of actual to expected prices. From the stand-point of expectation formation, the key aspect of the extended model is that observation of the economy-wide nominal interest rate conveys current global information to individuals. With respect to the effect of money supply shocks on output, the model yields results that are similar to those generated in simpler models. Anew result concerns the behavior of the anticipated real rate of return on earning assets. Because this variable is the pertinent relative price for commodity supply and demand decisions, it turns out to be unambiguous that positive money surprises raise the anticipated real rate of return. In fact, this response provides the essential channel in this equilibrium model by which a money shock can raise the supply of commodities and thereby increase output. However, it is possible through a sort of "liquidity" effect that positive money surprises can depress the economy-wide nominal interest rate.
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
0326.
Length: Date of creation: Mar 1979 Date of revision: Handle: RePEc:nbr:nberwo:0326
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Maurice Obstfeld & Alan C. Stockman, 1985.
"Exchange-Rate Dynamics,"
NBER Working Papers
1230, National Bureau of Economic Research, Inc.
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Other versions:
Obstfeld, Maurice & Stockman, Alan C., 1985.
"Exchange-rate dynamics,"
Handbook of International Economics,
in: R. W. Jones & P. B. Kenen (ed.), Handbook of International Economics, edition 1, volume 2, chapter 18, pages 917-977
Elsevier.
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