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Real Adjustment and Exchange Rate Dynamics

In: Exchange Rates and International Macroeconomics

  • J. Peter Neary
  • Douglas D. Purvis

This paper presents a model designed to cast some light on the nature of macroeconomic responses to sectoral shocks and to provide a basis for investigation of the interaction between resource allocation and exchange-rate variability. We first develop the implications for the dynamics of the real exchange rate of a Marshallian distinction between short - and long-run supply responses to an endogenous disturbance. Marshall's partial-equilibrium analysis stressed the overshooting of a relative price due to short-run factor fixity ; our analysis derives this result in a general equilibrium context. (However, in the general-equilibrium model it is possible that the long-run price response is perverse so that, rather than overshooting, the short-run relative price response would actually be in the "wrong direction".) We then extend the framework to incorporate the behaviour of money prices in the face of these changing relative prices. The model focusses on monetary equilibrium combined with rational speculation ; the dynamic behaviour of the nominal exchange rate exhibits a straightforward dependence on that of the real exchange rate. But the latter is independent of monetary equilibrium and, in particular, of any speculative behaviour ; any influence of specularors on the nominal exchange rate gives rise to identical movements in the equilibrium nominal price of services.

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This chapter was published in:
  • Jacob A. Frenkel, 1983. "Exchange Rates and International Macroeconomics," NBER Books, National Bureau of Economic Research, Inc, number fren83-1, June.
  • This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 11383.
    Handle: RePEc:nbr:nberch:11383
    Contact details of provider: Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
    Phone: 617-868-3900
    Web page: http://www.nber.org
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