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Money and the Terms of Trade

  • Julio J. Rotemberg

This paper examines the connection between money and the terms of trade in the context of a simple monetary equilibrium model with flexible prices. Money is held for transactions purposes. Because carrying out financial transactions is costly, households visit their financial intermediaries only occasionally. An important feature of the model is that different households visit the financial intermediaries at different times. This is sufficient to ensure that even though the model features perfect foresight and competitive markets, monetary policies affect output under both fixed and flexible exchange rates. Moreover, in the latter regime expansionary monetary policies tend to worsen the terms of trade while this is not the case under fixed exchange rates.

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File URL: http://www.nber.org/papers/w1003.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1003.

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Date of creation: Oct 1982
Date of revision:
Publication status: published as Rotemberg, J., Journal of International Economics, Vol. 19, 1985, pp. 141-1 60.
Handle: RePEc:nbr:nberwo:1003
Note: EFG
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  1. Grossman, Sanford J & Shiller, Robert J, 1981. "The Determinants of the Variability of Stock Market Prices," American Economic Review, American Economic Association, vol. 71(2), pages 222-27, May.
  2. Stockman, Alan C, 1980. "A Theory of Exchange Rate Determination," Journal of Political Economy, University of Chicago Press, vol. 88(4), pages 673-98, August.
  3. Obstfeld, Maurice, 1981. "Macroeconomic Policy, Exchange-Rate Dynamics, and Optimal Asset Accumulation," Journal of Political Economy, University of Chicago Press, vol. 89(6), pages 1142-61, December.
  4. Swoboda, Alexander K, 1978. "Gold, Dollars, Euro-Dollars, and the World Money Stock under Fixed Exchange Rates," American Economic Review, American Economic Association, vol. 68(4), pages 625-42, September.
  5. Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1161-76, December.
  6. Helpman, Elhanan & Razin, Assaf, 1982. "Dynamics of a Floating Exchange Rate Regime," Journal of Political Economy, University of Chicago Press, vol. 90(4), pages 728-54, August.
  7. Julio J. Rotemberg, 1982. "A Monetary Equilibrium Model with Transactions Costs," NBER Working Papers 0978, National Bureau of Economic Research, Inc.
  8. Blanchard, Olivier Jean & Kahn, Charles M, 1980. "The Solution of Linear Difference Models under Rational Expectations," Econometrica, Econometric Society, vol. 48(5), pages 1305-11, July.
  9. Hansen, Lars Peter & Singleton, Kenneth J, 1982. "Generalized Instrumental Variables Estimation of Nonlinear Rational Expectations Models," Econometrica, Econometric Society, vol. 50(5), pages 1269-86, September.
  10. Grossman, Sanford & Weiss, Laurence, 1983. "A Transactions-Based Model of the Monetary Transmission Mechanism," American Economic Review, American Economic Association, vol. 73(5), pages 871-80, December.
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