Can Using Interest Rates to Check Domestic Demand Raise the Strength of the Sterling in the Long Run?
An updated version of Krugmans (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: |
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.:
- Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
- 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.
- 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.
- repec:tcd:wpaper:tep16 is not listed on IDEAS
- Philip Lane & Gian Maria Milesi-Ferreti, 2005.
"A Global Perspective on External Positions,"
Trinity Economics Papers
2000516, Trinity College Dublin, Department of Economics.
- 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 R. Lane & Gian Maria Milesi-Ferretti, 2005. "A Global Perspective on External Positions," NBER Working Papers 11589, National Bureau of Economic Research, Inc.
- Gian-Maria Milesi-Ferretti & Philip R. Lane, 2005. "A Global Perspectiveon External Positions," IMF Working Papers 05/161, International Monetary Fund.
- 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 Lane & Gian Maria Milesi-Ferreti, 2005. "A Global Perspective on External Positions," Trinity Economics Papers tep16, Trinity College Dublin, Department of Economics.
- Blanchard, Olivier & Giavazzi, Francesco & Sá, Filipa, 2005.
"The US Current Account and the Dollar,"
CEPR Discussion Papers
4888, C.E.P.R. Discussion Papers.
- 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.
- 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.
- 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.
- 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.
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.