Can Using Interest Rates to Check Domestic Demand Raise the Strength of the Sterling in the Long Run?
An updated version of Krugman's (1993) MMF framework is used to consider the implications of buoyant domestic demand for the real exchange rate and debt dynamics. The updating includes a Taylor rule for monetary policy and explicit treatment of external assets and liabilities. In response to an exogenous rise in the aggregate demand, short-run appreciation of the real exchange rate is followed by a prolonged decline as external debt accumulates and net wealth dete- riorates. Whether in equilibrium the real exchange rate is stronger or weaker depends crucially on a comparison of real interest rates and the growth rate. If the domestic growth rate is higher than global real interest rates, the currency may strengthen in the long run despite the deterioration of net external assets. To see whether the strength of sterling is sustainable, the analysis is briey calibrated to UK data over the last decade. Blanchard, Giavazzi and Sa (2005) suggest that international liabilities to be treated as imperfect substitutes: so we check to see how this would affect our results.
|Date of creation:||2006|
|Date of revision:|
|Contact details of provider:|| Postal: 4, bld Francois Mitterand, 91025 Evry Cedex|
Phone: +33 1 69 47 71 77
Fax: +33 1 69 47 70 50
Web page: http://epee.univ-evry.fr
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Leith, Campbell & Simon Wren-Lewis, 2003.
"Interactions Between Monetary and Fiscal Policy Under Flexible Exchange Rates,"
Royal Economic Society Annual Conference 2003
134, Royal Economic Society.
- Leith, Campbell & Wren-Lewis, Simon, 2008. "Interactions between monetary and fiscal policy under flexible exchange rates," Journal of Economic Dynamics and Control, Elsevier, vol. 32(9), pages 2854-2882, September.
- Campbell Leith & Simon Wren-Lewis, . "Interactions Between Monetary and Fiscal Policy under Flexible Exchange Rates," Working Papers 2002_11, Business School - Economics, University of Glasgow.
- Gian-Maria Milesi-Ferretti & Philip R. Lane, 2005.
"A Global Perspectiveon External Positions,"
IMF Working Papers
05/161, International Monetary Fund.
- Philip Lane & Gian Maria Milesi-Ferreti, 2005. "A Global Perspective on External Positions," Trinity Economics Papers tep16, Trinity College Dublin, Department of Economics.
- Lane, Philip R. & Milesi-Ferretti, Gian Maria, 2005. "A Global Perspective on External Positions," CEPR Discussion Papers 5234, C.E.P.R. Discussion Papers.
- Philip R. Lane & Gian Maria Milesi-Ferretti, 2005. "A Global Perspective on External Positions," NBER Working Papers 11589, National Bureau of Economic Research, Inc.
- Philip Lane & Gian Maria Milesi-Ferretti, 2005. "A Global Perspective on External Positions," The Institute for International Integration Studies Discussion Paper Series iiisdp079, IIIS.
- Philip Lane & Gian Maria Milesi-Ferreti, 2005. "A Global Perspective on External Positions," Trinity Economics Papers 2000516, Trinity College Dublin, Department of Economics.
- Olivier Blanchard & Francesco Giavazzi & Filipa Sa, 2005.
"The U.S. Current Account and the Dollar,"
NBER Working Papers
11137, National Bureau of Economic Research, Inc.
- Hausmann, Ricardo & Sturzenegger, Federico, 2006.
"Global Imbalances or Bad Accounting? The Missing Dark Matter in the Wealth of Nations,"
Working Paper Series
rwp06-003, Harvard University, John F. Kennedy School of Government.
- Ricardo Hausmann and Federico Sturzenegger, 2006. "Global imbalances or bad accounting? The missing dark matter in the wealth of nations," Business School Working Papers globalimbal, Universidad Torcuato Di Tella.
- Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
- repec:tcd:wpaper:tep16 is not listed on IDEAS
- Wynne Godley & Alex Izurieta & Gennaro Zezza, 2004. "Prospects and Policies for the U.S. Economy: Why Net Exports Must Now Be the Motor for U.S. Growth," Economics Strategic Analysis Archive 04-7, Levy Economics Institute.
- Barry Eichengreen & Ricardo Hausmann & Ugo Panizza, 2003. "Currency Mismatches, Debt Intolerance and Original Sin: Why They Are Not the Same and Why it Matters," NBER Working Papers 10036, National Bureau of Economic Research, Inc.
When requesting a correction, please mention this item's handle: RePEc:eve:wpaper:06-13. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Samuel Nosel)
If references are entirely missing, you can add them using this form.