Comprehensive accounting in simple open economy macroeconomics with endogenous sterilization or flexible exchange rates
This paper presents a stock-flow model of two economies (together comprising the whole world) that trade goods and financial assets with one another. The first part of the paper describes a single economy on a fixed exchange rate, with no private capital flows, in order to obtain simple analytic solutions that display the basic constraints and forces at work--notably, endogenous "sterilization." The second part describes a flexible exchange rate model, with two economies trading financial assets as well as merchandise. A final section adapts the two-country model to describe a fixed exchange rate regime. Our findings challenge established results, such as those of the Mundell- Fleming model.
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Volume (Year): 28 (2006)
Issue (Month): 2 (January)
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