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The Real Exchange Rate as a Tool of Commercial Policy

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  • Michael Mussa
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    Abstract

    This paper develops a dynamic, rational expectations model that generalizes both the standard, two-country, two-commodity model of real trade theory and the "dependent economy" model of open economy macroeconomics. This model is used to show how a variety of government policies can affect the real exchange rate (defined as the relative price of domestic goods in terms of foreign goods) and thereby replicate some of the effects of commercial policy. The policies considered include temporary and expected future shifts in the distribution of government spending, temporary general tax reductions financed by the issuance of government debt, controls on international capital movements, and policies that combine a fixed path of the nominal exchange rate and a fixed path of the nominal money supply (supported by sterilized official intervention in the foreign exchange market).

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    File URL: http://www.nber.org/papers/w1577.pdf
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    Bibliographic Info

    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1577.

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    Date of creation: Mar 1985
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    Publication status: published as Mussa, Michael. "The Effects of Commercial, Fiscal, Monetary and Exchange Rate Policies on the Real Exchange Rate,"Economic Adjustment and Exchange Rates in Developing Countries, edited by S. Edwards and Liquat Ahamed. Chicago: UCP (1986)
    Handle: RePEc:nbr:nberwo:1577

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    1. T. W.Swan, 1960. "Economic Control In A Dependent Economy," The Economic Record, The Economic Society of Australia, vol. 36(73), pages 51-66, 03.
    2. Barro, Robert J., 1974. "Are Government Bonds Net Wealth?," Scholarly Articles 3451399, Harvard University Department of Economics.
    3. W. E. G. Salter, 1959. "Internal And External Balance: The Role Op Price And Expenditure Effects," The Economic Record, The Economic Society of Australia, vol. 35(71), pages 226-238, 08.
    4. Buiter, Willem H. & Miller, Marcus, 1982. "Real exchange rate overshooting and the output cost of bringing down inflation," European Economic Review, Elsevier, vol. 18(1), pages 85-123.
    5. Dornbusch, Rudiger, 1975. "Alternative Price Stabilization Rules and the Effects of Exchange Rate Changes," The Manchester School of Economic & Social Studies, University of Manchester, vol. 43(3), pages 275-92, September.
    6. Razin, Assaf & Svensson, Lars E. O., 1983. "Trade taxes and the current account," Economics Letters, Elsevier, vol. 13(1), pages 55-57.
    7. Maurice Obstfeld, 1983. "Intertemporal Price Speculation and the Optimal Current-Account Deficit," NBER Working Papers 1100, National Bureau of Economic Research, Inc.
    8. Calvo, Guillermo A & Rodriguez, Carlos Alfredo, 1977. "A Model of Exchange Rate Determination under Currency Substitution and Rational Expectations," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 617-25, June.
    9. Blanchard, Olivier J, 1985. "Debt, Deficits, and Finite Horizons," Journal of Political Economy, University of Chicago Press, vol. 93(2), pages 223-47, April.
    10. Robert A. Mundell, 1960. "The Public Debt, Corporate Income Taxes, and the Rate of Interest," Journal of Political Economy, University of Chicago Press, vol. 68, pages 622.
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    Cited by:
    1. Robert W. Staiger & Alan O. Sykes, 2008. ""Currency Manipulation" and World Trade," NBER Working Papers 14600, National Bureau of Economic Research, Inc.

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