Influences of Demand Shocks on Exchange Rate Volatility: Imperfect Capital Mobility and Substitutability
This paper distinguishes between the degree of capital mobility and asset substitutability in a Dornbusch-type model and investigates the effect of a unit demand shock to the exchange rate volatility by using a simulation approach. Raising the interest rate causes the exchange rate to appreciate over time after the first impact and has a contractionary effect on the economy. An aggregate demand shock leads to a depreciation in the first instance. Overshooting does not take place however due to low marginal propensities to consume. Copyright 1996 by Blackwell Publishers Ltd and The Victoria University of Manchester
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Volume (Year): 64 (1996)
Issue (Month): 1 (March)
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