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Money and the Terms of Trade

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  • Julio J. Rotemberg

Abstract

This paper examines the connection between money and the terms of trade in the context of a simple monetary equilibrium model with flexible prices. Money is held for transactions purposes. Because carrying out financial transactions is costly, households visit their financial intermediaries only occasionally. An important feature of the model is that different households visit the financial intermediaries at different times. This is sufficient to ensure that even though the model features perfect foresight and competitive markets, monetary policies affect output under both fixed and flexible exchange rates. Moreover, in the latter regime expansionary monetary policies tend to worsen the terms of trade while this is not the case under fixed exchange rates.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1003.

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Date of creation: Oct 1982
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Publication status: published as Rotemberg, J., Journal of International Economics, Vol. 19, 1985, pp. 141-1 60.
Handle: RePEc:nbr:nberwo:1003

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  1. Alan C. Stockman, 1978. "A Theory of Exchange Rate Determination," UCLA Economics Working Papers 113, UCLA Department of Economics.
  2. S. Grossman & R. Shiller, . "The Determinants of the Variability of Stock Market Price," Rodney L. White Center for Financial Research Working Papers 18-80, Wharton School Rodney L. White Center for Financial Research.
  3. Swoboda, Alexander K, 1978. "Gold, Dollars, Euro-Dollars, and the World Money Stock under Fixed Exchange Rates," American Economic Review, American Economic Association, vol. 68(4), pages 625-42, September.
  4. Maurice Obstfeld, 1980. "Macroeconomic Policy, Exchange-Rate Dynamics, and Optimal Asset Accumulation," NBER Working Papers 0599, National Bureau of Economic Research, Inc.
  5. Hansen, Lars Peter & Singleton, Kenneth J, 1982. "Generalized Instrumental Variables Estimation of Nonlinear Rational Expectations Models," Econometrica, Econometric Society, vol. 50(5), pages 1269-86, September.
  6. Helpman, Elhanan & Razin, Assaf, 1982. "Dynamics of a Floating Exchange Rate Regime," Scholarly Articles 3445095, Harvard University Department of Economics.
  7. Julio J. Rotemberg, 1982. "A Monetary Equilibrium Model with Transactions Costs," NBER Working Papers 0978, National Bureau of Economic Research, Inc.
  8. Blanchard, Olivier Jean & Kahn, Charles M, 1980. "The Solution of Linear Difference Models under Rational Expectations," Econometrica, Econometric Society, vol. 48(5), pages 1305-11, July.
  9. Grossman, Sanford & Weiss, Laurence, 1983. "A Transactions-Based Model of the Monetary Transmission Mechanism," American Economic Review, American Economic Association, vol. 73(5), pages 871-80, December.
  10. Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1161-76, December.
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Cited by:
  1. Obstfeld, Maurice, 1998. " Open-Economy Macroeconomics: Developments in Theory and Policy," Scandinavian Journal of Economics, Wiley Blackwell, vol. 100(1), pages 247-75, March.
  2. Alvarez, Fernando & Atkeson, Andrew, 1997. "Money and exchange rates in the Grossman-Weiss-Rotemberg model," Journal of Monetary Economics, Elsevier, vol. 40(3), pages 619-640, December.
  3. Fernando Alvarez & Andrew Atkeson & Patrick J. Kehoe, 2008. "Time-varying risk, interest rates, and exchange rates in general equilibrium," Staff Report 371, Federal Reserve Bank of Minneapolis.
  4. Schlagenhauf, Don E. & Wrase, Jeffrey M., 1995. "Liquidity and real activity in a simple open economy model," Journal of Monetary Economics, Elsevier, vol. 35(3), pages 431-461, June.
  5. Giovanna Tagliabue, 2005. "Co-integrating relationship between terms of trade, money and current account: the italian evidence," Operations Research and Decisions, Wroclaw University of Technology, Institute of Organization and Management, vol. 3, pages 99-111.
  6. Don E. Schlagenhauf & Jeffry M. Wrase, 1992. "A monetary, open-economy model with capital mobility," Discussion Paper / Institute for Empirical Macroeconomics 67, Federal Reserve Bank of Minneapolis.
  7. Miller, Preston J. & Todd, Richard M., 1995. "Real effects of monetary policy in a world economy," Journal of Economic Dynamics and Control, Elsevier, vol. 19(1-2), pages 125-153.
  8. Preston J. Miller & Richard M. Todd, 1992. "Real effects of monetary policy in a world economy," Staff Report 154, Federal Reserve Bank of Minneapolis.

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