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Money Supply Growth and Exchange Rate Dynamics

Author

Listed:
  • H. Levin, Jay

    (Wayne State University)

Abstract

The purpose of this paper is to re-examine the issue of exchange rate dynam - ics when the central bank undertakes a change in the growth rate of the money supply. The original analysis of exchange rate dynamics, the seminal model of Dornbusch, assumed that the growth rate of the money supply was zero and that the central bank permanently changed the money stock. In reality, howev - er, central banks typically maintain money supply growth targets rather than money stock targets. Therefore, it seems appropriate to re-examine the issue of exchange rate dynamics using the money supply growth rate as the central bank’s policy instrument. The paper analyzes the problem using a variable out - put version of the Dornbusch model. Perhaps the most significant finding in the paper is that money supply growth causes the exchange rate to either overshoot or undershoot. In addition, the real exchange rate depends inversely on the real interest rate during part of the adjustment process, in contrast to the real inter - est dif ferential model.

Suggested Citation

  • H. Levin, Jay, 1997. "Money Supply Growth and Exchange Rate Dynamics," Journal of Economic Integration, Center for Economic Integration, Sejong University, vol. 12, pages 344-358.
    • Handle: RePEc:ris:integr:0053
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    Citations

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    Cited by:

    1. Chavan, Sumit Sunil & Shafighi, Najla, 2021. "Exchange Rate Determination in Asia," MPRA Paper 110622, University Library of Munich, Germany.
    2. Thida Oo & Jerome Kueh & Daw Tin Hla, 2019. "Determinants of Export Performance in ASEAN Region: Panel Data Analysis," International Business Research, Canadian Center of Science and Education, vol. 12(8), pages 1-14, August.
    3. Kiptui, Moses C. & Ndirangu, Lydia, 2015. "Determinants of Equilibrium Real Exchange Rate and its Misalignment in Kenya: A Behavioral Equilibrium Exchange Rate Approach," MPRA Paper 70542, University Library of Munich, Germany, revised 06 Apr 2016.
    4. Ali Trabelsi Karoui & Aida Kammoun, 2021. "Exchange Rate Determination: Mixed Microstructural and Macroeconomic Approach," International Journal of Economics and Financial Issues, Econjournals, vol. 11(3), pages 89-106.
    5. Hicham Ayad, 2020. "Money Supply, Inflation and Economic Growth: Co-Integration and Causality Analysis," Studia Universitatis Babeș-Bolyai Oeconomica, Sciendo, vol. 65(2), pages 29-45, August.

    More about this item

    Keywords

    Money; Supply; Growth;
    All these keywords.

    JEL classification:

    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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