IDEAS home Printed from
   My bibliography  Save this paper

Monetary Policy Under Exchange Rate Flexibility


  • Rudiger Dornbusch


The continuing depreciation of the dollar stands out as one of the big policy issues. It has started to impinge on U.S. monetary policy; it influences the chances for international commercial diplomacy, and it is enhancing the move toward European monetary integration. Above all it leaves most observers with a puzzle as to the causes of the ongoing depreciation. This paper will, of course, not resolve the puzzle. ft rather attempts to layout the basic analytical framework that has been developed for the analysis of exchange-rate questions and to relate it to the question of monetary policy. Part I concentrates on the development of the relevant theoretical framework. The main points to be made here are: (i) exchange rates are primarily deter-mined in asset markets with expectations playing a dominant role; (ii) the sharpest formulation of exchange-rate theory is the "monetary approach, "Chicago's quantity theory of the open economy; (iii) purchasing power parity is a precarious reed on which to hang short-term exchange-rate theory; (iv) the current account has just made it back as a determinant of exchange rates

Suggested Citation

  • Rudiger Dornbusch, 1979. "Monetary Policy Under Exchange Rate Flexibility," NBER Working Papers 0311, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:0311
    Note: ITI IFM

    Download full text from publisher

    File URL:
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    1. Martin Feldstein, 1974. "Incidence of a Capital Income Tax in a Growing Economy with Variable Savings Rates," Review of Economic Studies, Oxford University Press, vol. 41(4), pages 505-513.
    2. Martin Feldstein, 1980. "International differences in social security and saving," NBER Chapters,in: Econometric Studies in Public Finance, pages 225-244 National Bureau of Economic Research, Inc.
    3. Jagdish N. Bhagwati, 1978. "Anatomy and Consequences of Exchange Control Regimes," NBER Books, National Bureau of Economic Research, Inc, number bhag78-1, January.
    4. Frenkel, Jacob A & Levich, Richard M, 1977. "Transaction Costs and Interest Arbitrage: Tranquil versus Turbulent Periods," Journal of Political Economy, University of Chicago Press, vol. 85(6), pages 1209-1226, December.
    Full references (including those not matched with items on IDEAS)


    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.

    Cited by:

    1. Henriksson, Roy. & Lessard, Donald R., 1982. "The efficiency of the forward exchange market : a conditional nonparametric test of forecasting ability," Working papers 1337-82., Massachusetts Institute of Technology (MIT), Sloan School of Management.
    2. Murray, John & Mark Zelmer & Zahir Antia, 2000. "International Financial Crises and Flexible Exchange Rates: Some Policy Lessons from Canada," Technical Reports 88, Bank of Canada.
    3. Keen, Peter G. W., 1979. "Information systems and organizational change," Working papers 1087-79. Report (Alfred P, Massachusetts Institute of Technology (MIT), Sloan School of Management.
    4. Melvin, Michael & Prins, John & Shand, Duncan, 2013. "Forecasting Exchange Rates: an Investor Perspective," Handbook of Economic Forecasting, Elsevier.
    5. John Sarich, 2006. "What do we know about the real exchange rate? A classical cost of production story," Review of Political Economy, Taylor & Francis Journals, vol. 18(4), pages 469-496.
    6. Jacques Mélitz, 1982. "Jusqu'à quel point doit-on simplifier la modélisation du taux de change ?," Revue Économique, Programme National Persée, vol. 33(4), pages 675-694.
    7. Ernesto LEON CASTRO & Ezequiel AVILÉS OCHOA & Anna Maria GIL LAFUENTE, 2016. "Exchange Rate Usd/Mxn Forecast Through Econometric Models, Time Series And Howma Operators," ECONOMIC COMPUTATION AND ECONOMIC CYBERNETICS STUDIES AND RESEARCH, Faculty of Economic Cybernetics, Statistics and Informatics, vol. 50(4), pages 135-150.
    8. Richard K. Lyons, 1991. "Floating Exchange Rates in Peru, 1950-54," NBER Working Papers 3775, National Bureau of Economic Research, Inc.
    9. Jacob A. Frenkel, 1980. "The Collapse of Purchasing Power Parities during the 1970s," NBER Working Papers 0569, National Bureau of Economic Research, Inc.

    More about this item


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:0311. 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: (). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.