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Demand Changes and Real Exchange Rate Dynamics in a Finite-Horizon Model with Sectoral Adjustment Costs

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  • Hung-Ju Chen

    () (Department of Economics, National Taiwan University, 21 Hsu-Chow Road, Taipei 100, Taiwan)

  • Chen-Min Hsu

    () (Department of Economics, National Taiwan University, 21 Hsu-Chow Road, Taipei 100, Taiwan)

Abstract

In this paper, we use the Blanchard-type uncertain lifetime overlapping generations framework to develop a three-good open economy to examine the effects of demand changes on the economic performance of small open economies with sectoral adjustment costs. Our simulation results reveal a discernible Harberger-Laursen-Metzler effect on both temporary and permanent terms-of-trade shocks. The inclusion of sectoral adjustment costs generates persistent deviations of the real exchange rate from its long-run equilibrium in response to terms-of-trade shocks, with the degree of sectoral adjustment costs having an effect on the subsequent dynamic transition of the economy. We also find that an increase in the mortality rate leads to a lowering of the current account.

Suggested Citation

  • Hung-Ju Chen & Chen-Min Hsu, 2009. "Demand Changes and Real Exchange Rate Dynamics in a Finite-Horizon Model with Sectoral Adjustment Costs," Southern Economic Journal, Southern Economic Association, vol. 75(4), pages 1191-1211, April.
  • Handle: RePEc:sej:ancoec:v:75:4:y:2009:p:1191-1211
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    References listed on IDEAS

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    1. Jeffrey A. Frankel, 2008. "The Effect of Monetary Policy on Real Commodity Prices," NBER Chapters,in: Asset Prices and Monetary Policy, pages 291-333 National Bureau of Economic Research, Inc.
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    Cited by:

    1. Mahbub Morshed, A.K.M. & Turnovsky, Stephen J., 2011. "Real exchange rate dynamics: The role of elastic labor supply," Journal of International Money and Finance, Elsevier, vol. 30(7), pages 1303-1322.
    2. Mohsin, Mohammed & Park, Kihyun, 2015. "Monetary policy in a two-sector dependent economy," Economic Modelling, Elsevier, vol. 46(C), pages 118-129.

    More about this item

    JEL classification:

    • F11 - International Economics - - Trade - - - Neoclassical Models of Trade
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F47 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Forecasting and Simulation: Models and Applications

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