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A dynamic IS-LM-X model of exchange rate adjustments and movements

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  • Wang, Peijie

Abstract

This paper contributes to the literature through developing a model of exchange rate adjustments in a dynamic IS-LM-X analytical framework. Our new model, in particular, a) makes the IS-LM model dynamic; b) endogenizes the exchange rate and price variables and; c) extends the dynamic IS and LM components into the external sector in an open economy that evolves over time. The effect of a change in monetary policy on the exchange rate is evaluated and the trajectory towards its new long-run equilibrium level is projected. These are in contrast to the traditional monetary models of exchange rate determination and adjustments that play primarily with the LM component of the IS-LM framework in discrete steps. Effects of interest rate parity and purchasing power parity are then scrutinized, ranging from the short-term to the long-run continuously. The study has profound policy implications, especially in an era of quantitative easing.

Suggested Citation

  • Wang, Peijie, 2017. "A dynamic IS-LM-X model of exchange rate adjustments and movements," International Economics, Elsevier, vol. 149(C), pages 74-86.
  • Handle: RePEc:eee:inteco:v:149:y:2017:i:c:p:74-86
    DOI: 10.1016/j.inteco.2016.12.001
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    More about this item

    Keywords

    F31; F37; Exchange rate; Monetary policy; Interest rate parity; Purchasing power parity;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation: Models and Applications

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