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Monetary Stabilization, Intervention and Real Appreciation

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  • Rudiger Dornbusch

Abstract

This paper investigates the adjustment process to a reduction in the rate of credit creation in an open, flexible exchange rate economy. The framework of analysis is one of rational expectations with respect to interest rates, inflation and depreciation. The special feature of the model is the role of exchange market intervention and the resulting endogeneity of the money stock. The model is of empirical interest because of the growing experience in countries such as Israel, Spain or Argentina with th fact that monetary disinflation rapidly leads to real appreciation, unemployment and money creation induced by exchange market intervention. With capital flows and induced money creation threatening attempts at stabilization, there is a need to understand the relationship between intervention and inflation.

Suggested Citation

  • Rudiger Dornbusch, 1980. "Monetary Stabilization, Intervention and Real Appreciation," NBER Working Papers 0472, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:0472
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    References listed on IDEAS

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    1. Mussa, Michael, 1976. " The Exchange Rate, the Balance of Payments and Monetary and Fiscal Policy under a Regime of Controlled Floating," Scandinavian Journal of Economics, Wiley Blackwell, vol. 78(2), pages 229-248.
    2. Calvo, Guillermo A & Rodriguez, Carlos Alfredo, 1977. "A Model of Exchange Rate Determination under Currency Substitution and Rational Expectations," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 617-625, June.
    3. Girton, Lance & Roper, Don, 1977. "A Monetary Model of Exchange Market Pressure Applied to the Postwar Canadian Experience," American Economic Review, American Economic Association, vol. 67(4), pages 537-548, September.
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    1. Buiter, William H & Purvis, Douglas D, 1980. "Oil, Disinflation, and Export Competitiveness : A Model of the "Dutch Disease"," The Warwick Economics Research Paper Series (TWERPS) 185, University of Warwick, Department of Economics.

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