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Exchange Rate Rules and Macroeconomic Stability

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Author Info
Rudiger Dornbusch

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Abstract

This paper discusses exchange rate rules in their role as macroeconomic instruments. Two quite different approaches are pursued. The traditional view is that exchange rate flexibility is a substitute for money wage flexibility so that managed money and managed exchange rates yield the necessary instruments for internal and external balance. An entirely different perspective is offered by the modern macro-economics of wage contracting and the long run trade-off between the stability of output and the stability of inflation. In this context it is shown that exchange rate policies that seek to maintain real exchange rates or competitiveness do stabilize output but do so at the cost of in-creased inflation instability. Exchange rate rules such as full purchasing power parity crawling pegs are the analogue of full monetary accommodation of price disturbances.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 0473.

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Date of creation: Apr 1980
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Publication status: published as Dornbusch, Rudiger. "PPP Exchange-Rate Rules And Macroeconomic Stability," Journal of Political Economy, 1982, v90(1), 158-165. Open Economy Macroeconomics. New York: Basic Books, 1980.
Handle: RePEc:nbr:nberwo:0473

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Taylor, John B, 1979. "Staggered Wage Setting in a Macro Model," American Economic Review, American Economic Association, vol. 69(2), pages 108-13, May. [Downloadable!] (restricted)
  2. Lapan, Harvey E. & Enders, Walter, 2003. "Random Disturbances and the Choice of Exchange Regimes in an Intergenerational Model," Staff General Research Papers 10824, Iowa State University, Department of Economics.
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  3. Boyer, Russell S, 1978. "Optimal Foreign Exchange Market Intervention," Journal of Political Economy, University of Chicago Press, vol. 86(6), pages 1045-55, December. [Downloadable!] (restricted)
  4. Parkin, Michael, 1977. "The Transition from Fixed Exchange Rates to Money Supply Targets," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 9(1), pages 228-42, February. [Downloadable!] (restricted)
  5. Weber, Warren E, 1981. "Output Variability under Monetary Policy and Exchange Rate Rules," Journal of Political Economy, University of Chicago Press, vol. 89(4), pages 733-51, August. [Downloadable!] (restricted)
  6. Barro, Robert J, 1978. "A Stochastic Equilibrium Model of an Open Economy under Flexible Exchange Rates," The Quarterly Journal of Economics, MIT Press, vol. 92(1), pages 149-64, February. [Downloadable!] (restricted)
  7. Mussa, Michael, 1976. " The Exchange Rate, the Balance of Payments and Monetary and Fiscal Policy under a Regime of Controlled Floating," Scandinavian Journal of Economics, Blackwell Publishing, vol. 78(2), pages 229-48.
  8. Hahn, Frank H., 1977. "The monetary approach to the balance of payments," Journal of International Economics, Elsevier, vol. 7(3), pages 231-249, August. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Leiderman, Leonardo & Liviatan, Nissan, 1989. "Macroeconomic performance before and after disinflation in Israel," Policy Research Working Paper Series 311, The World Bank. [Downloadable!]
  2. Francesco Menoncin & Marco Tronzano, . "Optimal real exchange rate targeting: a stochastic analysis," Working Papers ubs0401, University of Brescia, Department of Economics. [Downloadable!]
  3. Kool,C.J.M. & Lammertsma,A., 1997. "The Phillips Curve, the Persistence of Inflation, and the Lucas Critique:Evidence from Exchange-Rate Regimes: Comment," Research Memoranda 020, Maastricht : METEOR, Maastricht Research School of Economics of Technology and Organization. [Downloadable!]
  4. Martin Uribe, 2002. "Real Exchange Rate Targeting and Macroeconomic Instability," NBER Working Papers 9294, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  5. Sosunov, Kirill & Zamulin, Oleg, 2006. "The inflationary consequences of real exchange rate targeting via accumulation of reserves," BOFIT Discussion Papers 11/2006, Bank of Finland, Institute for Economies in Transition. [Downloadable!]
    Other versions:
  6. John B. Taylor, 1984. "The Role of Expectations in the Choice of Monetary Policy," NBER Working Papers 1044, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
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