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The Dynamics of a Small Open Economy under Alternative Exchange Rate Regimes Patterns in Neighboring Areas

Author

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  • George Economides

    (Athens University of Economics and Business, Athens, Greece)

Abstract

This paper extends the literature on open economy macroeconomics by studying the endogenous dynamics of a structural model under various exchange rate regimes. We assume that agents have near-rational expectations concerning the formation of future nominal wages so that there is no money neutrality. The paper characterizes the region of parameters that yield unique stable equilibria, and shows how different exchange rate policies can make stability easier or harder. We also study the possibility of cycles. Nominal inertia in the form of near-rationality is not sufficient to generate cycles and hence overshooting.

Suggested Citation

  • George Economides, 2000. "The Dynamics of a Small Open Economy under Alternative Exchange Rate Regimes Patterns in Neighboring Areas," Ekonomia, Cyprus Economic Society and University of Cyprus, vol. 4(1), pages 73-94, Summer.
  • Handle: RePEc:ekn:ekonom:v:4:y:2000:i:1:p:73-94
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    References listed on IDEAS

    as
    1. Sarno, Lucio, 2000. "Real exchange rate behavior in the Middle East: a re-examination," Economics Letters, Elsevier, vol. 66(2), pages 127-136, February.
    2. Venus Khim-Sen Liew, 2003. "The Validity of PPP Revisited: An Application of Non-linear Unit Root Test," International Finance 0308001, EconWPA.
    3. Vogelsang, Timothy J., 1997. "Wald-Type Tests for Detecting Breaks in the Trend Function of a Dynamic Time Series," Econometric Theory, Cambridge University Press, vol. 13(06), pages 818-848, December.
    4. repec:cup:etheor:v:13:y:1997:i:6:p:818-49 is not listed on IDEAS
    5. Salehizadeh, Mehdi & Taylor, Robert, 1999. "A test of purchasing power parity for emerging economies," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 9(2), pages 183-193, April.
    6. Mark P. Taylor, 2003. "Purchasing Power Parity," Review of International Economics, Wiley Blackwell, vol. 11(3), pages 436-452, August.
    7. Sabate, Marcela & Gadea, Maria Dolores & Serrano, Jose Maria, 2003. "PPP and structural breaks. The peseta-sterling rate, 50 years of a floating regime," Journal of International Money and Finance, Elsevier, vol. 22(5), pages 613-627, October.
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    More about this item

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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