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The Employment, Investment and Current Account Effects of Exchange Rate Policies in a Cash-in-Advance Economy

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Author Info
Arman Mansoorian (York University, Canada)
Mohammed Mohsin (University of Tennessee, USA)

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Abstract

The effects of exchange rate policies are examined for a small open economy in an infinite horizon model with investment, labor/leisure choice, and cash-in-advance for consumption. An increase in the rate of depreciation of the domestic currency reduces consumption and labor supply, as the higher inflation increases the price of consumption relative to leisure. The fall in labor reduces the marginal productivity of capital, and a fall in investment. The country runs a current account surplus, despite the fall in output. The dynamics of the model for permanent, temporary and anticipated policy changes are fully worked out.

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File URL: http://dept.econ.yorku.ca/research/workingPapers/working_papers/paper-3.pdf
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File Function: First version, 2002
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Publisher Info
Paper provided by York University, Department of Economics in its series Working Papers with number 2002_04.

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Length: 25 pages
Date of creation: Apr 2002
Date of revision:
Handle: RePEc:yca:wpaper:2002_04

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Related research
Keywords: Employment; Investment; Current Account; Cash-in-Advance;

Find related papers by JEL classification:
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
F31 - International Economics - - International Finance - - - Foreign Exchange
F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

References listed on IDEAS
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    Other versions:
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    Other versions:
  4. Obstfeld, Maurice, 1981. "Capital Mobility and Devaluation in an Optimizing Model with Rational Expectations," American Economic Review, American Economic Association, vol. 71(2), pages 217-21, May. [Downloadable!] (restricted)
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    Other versions:
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    Other versions:
  7. Sebastian Edwards & Carlos A. Végh, 1997. "Banks and Macroeconomic Disturbances Under Predetermined Exchange Rates," CEMA Working Papers: Serie Documentos de Trabajo. 115, Universidad del CEMA. [Downloadable!]
    Other versions:
  8. Arman Mansoorian, 1999. "On Cash in Advance Constraints for Open Economies," Working Papers 1999_02, York University, Department of Economics. [Downloadable!]
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    Other versions:
  12. Guillermo Calvo & Carlos A. Végh Gramont, 1990. "Credibility and the Dynamics of Stabilization Policy: A Basic Framework," IMF Working Papers 90/110, International Monetary Fund.
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    Other versions:
  14. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-91, June. [Downloadable!] (restricted)
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