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Real Adjustment and Exchange-rate Dynamics

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  • Neary, Peter J
  • Purvis, Douglas D

Abstract

This paper presents a model designed to cast some light on the nature of macroeconomic responses to sectoral shocks and to provide a basis for investigation of the interaction between resource allocation and exchange-rate variability. We first develop the implications for the dynamics of the real exchange rate of a Marshallian distinction between short - and long-run supply responses to an endogenous disturbance. Marshall's partial-equilibrium analysis stressed the overshooting of a relative price due to short-run factor fixity ; our analysis derives this result in a general equilibrium context. (However, in the general-equilibrium model it is possible that the long-run price response is perverse so that, rather than overshooting, the short-run relative price response would actually be in the "wrong direction".) We then extend the framework to incorporate the behaviour of money prices in the face of these changing relative prices. The model focusses on monetary equilibrium combined with rational speculation ; the dynamic behaviour of the nominal exchange rate exhibits a straightforward dependence on that of the real exchange rate. But the latter is independent of monetary equilibrium and, in particular, of any speculative behaviour ; any influence of specularors on the nominal exchange rate gives rise to identical movements in the equilibrium nominal price of services.

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Bibliographic Info

Paper provided by University of Warwick, Department of Economics in its series The Warwick Economics Research Paper Series (TWERPS) with number 203.

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Length: 42 pages
Date of creation: 1981
Date of revision:
Handle: RePEc:wrk:warwec:203

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Cited by:
  1. Kuralbayeva, Karlygash & Vines, David, 2006. "Terms of Trade Shocks in an Intertemporal Model: Should We Worry about the Dutch Disease or Excessive Borrowing?," CEPR Discussion Papers 5857, C.E.P.R. Discussion Papers.
  2. Masanao Aoki & Sebastian Edwards, 1982. "Export Boom and Dutch Disease: A Dynamic Analysis," UCLA Economics Working Papers 269, UCLA Department of Economics.
  3. Matsen, Egil & Roisland, Oistein, 2005. "Interest rate decisions in an asymmetric monetary union," European Journal of Political Economy, Elsevier, vol. 21(2), pages 365-384, June.
  4. Torvik, Ragnar, 2001. "Learning by doing and the Dutch disease," European Economic Review, Elsevier, vol. 45(2), pages 285-306, February.
  5. Bodenstein, Martin & Erceg, Christopher J. & Guerrieri, Luca, 2011. "Oil shocks and external adjustment," Journal of International Economics, Elsevier, vol. 83(2), pages 168-184, March.
  6. Egil Matsen & Ragnar Torvik, 2002. "Optimal Dutch Disease," Working Paper Series 2703, Department of Economics, Norwegian University of Science and Technology.
  7. Karlygash Kuralbayeva & David Vines, 2008. "Shocks to Terms of Trade and Risk-premium in an Intertemporal Model: The Dutch Disease and a Dutch Party," Open Economies Review, Springer, vol. 19(3), pages 277-303, July.
  8. van Wincoop, Eric, 1995. "A note on short-term intersectoral factor immobility," Journal of Economic Dynamics and Control, Elsevier, vol. 19(4), pages 845-856, May.
  9. Michael Bruno & Jeffrey Sachs, 1982. "Energy and Resource Allocation: A Dynamic Model of the "Dutch Disease"," NBER Working Papers 0852, National Bureau of Economic Research, Inc.

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