Adjustment to monetary policy and devaluation under two-tier and fixed exchange rate regimes
The purpose of this paper is to determine whether a two-tier exchange rate regime is more effective than a fixed rate regime in increasing acountry's ability to pursue an independent monetary policy in the short run.The analysis compares adjustment to a monetary policy and to a devaluation in the two exchange rate regimes in a portfolio model under imperfect asset substitutability. It is shown that the two policies have in the short run larger effects on interest rates under a two-tier regime. The duration of this effect, however, is longer under a fixed rate regime. The analysis is conducted for the case of static and rational expectations, demonstrating that the above results do not depend on the expectation mechanism.
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- R. Dornbusch, 1975.
"The Theory of Flexible Exchange Rate Regimes and Macroeconomic Policy,"
165, Massachusetts Institute of Technology (MIT), Department of Economics.
- Dornbusch, Rudiger, 1976. " The Theory of Flexible Exchange Rate Regimes and Macroeconomic Policy," Scandinavian Journal of Economics, Wiley Blackwell, vol. 78(2), pages 255-275.
- Kouri, Pentti J K & Porter, Michael G, 1974. "International Capital Flows and Portfolio Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 82(3), pages 443-467, May/June.
- Robert P. Flood & Nancy Peregrim Marion, 1982. "The Transmission of Disturbances under Alternative Exchange-Rate Regimes with Optimal Indexing," The Quarterly Journal of Economics, Oxford University Press, vol. 97(1), pages 43-66.
- Frenkel, Jacob A & Rodriguez, Carlos Alfredo, 1975. "Portfolio Equilibrium and the Balance of Payments: A Monetary Approach," American Economic Review, American Economic Association, vol. 65(4), pages 674-688, September.
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