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Exchange Rate Rules and Macroeconomic Stability

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  • Rudiger Dornbusch

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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File URL: http://www.nber.org/papers/w0473.pdf
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Bibliographic Info

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 Open Economy Macroeconomics. New York: Basic Books, 1980.
Handle: RePEc:nbr:nberwo:0473

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  1. Hahn, Frank H., 1977. "The monetary approach to the balance of payments," Journal of International Economics, Elsevier, vol. 7(3), pages 231-249, August.
  2. 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.
  3. Lapan, Harvey E. & Enders, Walter, 1980. "Random disturbances and the choice of exchange regimes in an intergenerational model," Journal of International Economics, Elsevier, vol. 10(2), pages 263-283, May.
  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.
  5. 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, Wiley Blackwell, vol. 78(2), pages 229-48.
  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.
  7. Taylor, John B, 1979. "Staggered Wage Setting in a Macro Model," American Economic Review, American Economic Association, vol. 69(2), pages 108-13, May.
  8. Boyer, Russell S, 1978. "Optimal Foreign Exchange Market Intervention," Journal of Political Economy, University of Chicago Press, vol. 86(6), pages 1045-55, December.
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Cited by:
  1. Demian Panigo & Pablo Chena & Ana Gárriz, 2010. "Effects of Productive Heterogeneity and Different Exchange Rate Schemes on the Employment Cycle in Argentina," Ensayos Económicos, Central Bank of Argentina, Economic Research Department, vol. 1(59), pages 81-130, July - Se.
  2. Martin Uribe, 1995. "Real exchange rate targeting and macroeconomic instability," International Finance Discussion Papers 505, Board of Governors of the Federal Reserve System (U.S.).
  3. Kirill Sosunov & Oleg Zamulin, 2006. "The Inflationary Consequences of Real Exchange Rate Targeting via Accumulation of Reserves," Working Papers w0082, Center for Economic and Financial Research (CEFIR).
  4. Leiderman, Leonardo & Liviatan, Nissan, 1989. "Macroeconomic performance before and after disinflation in Israel," Policy Research Working Paper Series 311, The World Bank.
  5. John B. Taylor, 1982. "The role of expectations in the choice of monetary policy," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 47-95.

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