IDEAS home Printed from https://ideas.repec.org/p/nbr/nberwo/1173.html
   My bibliography  Save this paper

Exchange Rate Dynamics With Sluggish Prices Under Alternative Price-Adjustment Rules

Author

Listed:
  • Maurice Obstfeld
  • Kenneth Rogoff

Abstract

This paper studies exchange rate behavior in models with moving long-run equilibria incorporating alternative price-adjustment mechanisms.The paper demonstrates that price-adjustment rules proposed by Mussa andby Barro and Grossman yield models that are empirically indistinguishable from each other. For speeds of goods-market adjustment that are "too fast," the Barro-Grossman rule appears to induce instability; but we argue that when the ruleis interpreted properly, models incorporating it are dynamically stable regardless of the speed at which disequilibriumis eliminated. The Barro-Grossman pricing scheme is shown to be a natural generalization, to a setting of moving long-run equilibria, of less versatile schemes proposed in earlier literature on exchange rate dynamics.

Suggested Citation

  • Maurice Obstfeld & Kenneth Rogoff, 1983. "Exchange Rate Dynamics With Sluggish Prices Under Alternative Price-Adjustment Rules," NBER Working Papers 1173, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:1173
    Note: ITI IFM
    as

    Download full text from publisher

    File URL: http://www.nber.org/papers/w1173.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Wilson, Charles A, 1979. "Anticipated Shocks and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 87(3), pages 639-647, June.
    2. Willem H. Buiter & Marcus Miller, 1991. "Real Exchange Rate Overshooting and the Output Cost of Bringing Down Inflation," NBER Chapters, in: International Volatility and Economic Growth: The First Ten Years of The International Seminar on Macroeconomics, pages 239-277, National Bureau of Economic Research, Inc.
    3. Buiter, Willem H & Miller, Marcus, 1981. "Monetary Policy and International Competitiveness: The Problems of Adjustment," Oxford Economic Papers, Oxford University Press, vol. 33(0), pages 143-175, Supplemen.
    4. Brunner, Karl & Meltzer, Allan H., 1976. "The Phillips curve," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 1(1), pages 1-18, January.
    5. Mussa, Michael, 1981. "Sticky Prices and Disequilibrium Adjustment in a Rational Model of the Inflationary Process," American Economic Review, American Economic Association, vol. 71(5), pages 1020-1027, December.
    6. Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1161-1176, December.
    7. McCallum, Bennett T, 1980. "Rational Expectations and Macroeconomic Stabilization Policy: An Overview," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 12(4), pages 716-746, November.
    8. Frankel, Jeffrey A, 1979. "On the Mark: A Theory of Floating Exchange Rates Based on Real Interest Differentials," American Economic Review, American Economic Association, vol. 69(4), pages 610-622, September.
    9. Green, Jerry & Laffont, Jean-Jacques, 1981. "Disequilibrium dynamics with inventories and anticipatory price-setting," European Economic Review, Elsevier, vol. 16(1), pages 199-221.
    10. Kouri, Pentti J K, 1976. " The Exchange Rate and the Balance of Payments in the Short Run and in the Long Run: A Monetary Approach," Scandinavian Journal of Economics, Wiley Blackwell, vol. 78(2), pages 280-304.
    11. Gray, Malcolm R & Turnovsky, Stephen J, 1979. "The Stability of Exchange Rate Dynamics under Perfect Myopic Foresight," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 20(3), pages 643-660, October.
    12. Lucas, Robert Jr, 1976. "Econometric policy evaluation: A critique," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 1(1), pages 19-46, January.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Obstfeld, Maurice & Stockman, Alan C., 1985. "Exchange-rate dynamics," Handbook of International Economics, in: R. W. Jones & P. B. Kenen (ed.), Handbook of International Economics, edition 1, volume 2, chapter 18, pages 917-977, Elsevier.
    2. Papell, David H., 1984. "Activist monetary policy and exchange-rate overshooting: The Deutsche mark/dollar rate," Journal of International Money and Finance, Elsevier, vol. 3(3), pages 293-310, December.
    3. Threemonkong, Attapol, 1992. "An intertemporal-optimizing general equilibrium model of exchange rates and external imbalances," ISU General Staff Papers 1992010108000012961, Iowa State University, Department of Economics.
    4. Joscha Beckmann & Ansgar Belke & Michael Kühl, 2009. "How Stable Are Monetary Models of the Dollar-Euro Exchange Rate?: A Time-Varying Coefficient Approach," Discussion Papers of DIW Berlin 944, DIW Berlin, German Institute for Economic Research.
    5. Hodrick, Robert J., 1989. "Risk, uncertainty, and exchange rates," Journal of Monetary Economics, Elsevier, vol. 23(3), pages 433-459, May.
    6. Frenkel, Jacob A. & Mussa, Michael L., 1985. "Asset markets, exchange rates and the balance of payments," Handbook of International Economics, in: R. W. Jones & P. B. Kenen (ed.), Handbook of International Economics, edition 1, volume 2, chapter 14, pages 679-747, Elsevier.
    7. Devereux, Michael & Purvis, Douglas D., 1984. "Fiscal Policy and the Real Exchange Rate Queen's Discussion Paper," Queen's Institute for Economic Research Discussion Papers 275199, Queen's University - Department of Economics.
    8. Frydman Roman & Goldberg Michael D., 2008. "Macroeconomic Theory for a World of Imperfect Knowledge," Capitalism and Society, De Gruyter, vol. 3(3), pages 1-78, December.
    9. Levine, Paul & Currie, David, 1985. "Optimal feedback rules in an open economy macromodel with rational expectations," European Economic Review, Elsevier, vol. 27(2), pages 141-163, March.
    10. Pierre Villa, 1991. "Règles de taux d'intérêt en changes flexibles et en présence de chocs permanents," Revue Économique, Programme National Persée, vol. 42(5), pages 867-900.
    11. repec:zbw:rwirep:0134 is not listed on IDEAS
    12. Joscha Beckmann & Ansgar Belke & Michael Kühl, 2009. "How Stable Are Monetary Models of the Dollar-Euro Exchange Rate? - A Time-varying Coefficient Approach," Ruhr Economic Papers 0134, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen.
    13. Frenkel, Jacob A. & Rodriguez, Carlos A., 1980. "Exchange Rate Dynamics and Overshooting Hypothesis," Foerder Institute for Economic Research Working Papers 275323, Tel-Aviv University > Foerder Institute for Economic Research.
    14. Oscar Bajo Rubio, 1998. "Monetary and Fiscal Policies in Dynamic Models of the Open Economy," Documentos de Trabajo - Lan Gaiak Departamento de Economía - Universidad Pública de Navarra 9806, Departamento de Economía - Universidad Pública de Navarra.
    15. Goldberg, Michael D., 2000. "On empirical exchange rate models: what does a rejection of the symmetry restriction on short-run interest rates mean?," Journal of International Money and Finance, Elsevier, vol. 19(5), pages 673-688, October.
    16. Alba, Joseph D. & Papell, David H., 1998. "Exchange rate determination and inflation in Southeast Asian countries," Journal of Development Economics, Elsevier, vol. 55(2), pages 421-437, April.
    17. Myers, Robert J. & Oehmke, James F., 1987. "Instability and Risk as Rationales for Government Intervention in Agriculture," Staff Paper Series 200938, Michigan State University, Department of Agricultural, Food, and Resource Economics.
    18. J. David Richardson, 1983. "The New Nexus among Trade, Industrial and Exchange-Rate Policies," NBER Working Papers 1099, National Bureau of Economic Research, Inc.
    19. Obstfeld, Maurice, 1982. "Relative Prices, Employment, and the Exchange Rate in an Economy with Foresight," Econometrica, Econometric Society, vol. 50(5), pages 1219-1242, September.
    20. Joscha Beckmann & Ansgar Belke & Michael Kühl, 2011. "The dollar-euro exchange rate and macroeconomic fundamentals: a time-varying coefficient approach," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 147(1), pages 11-40, April.
    21. Mulder, C.B., 1986. "Testing Korteweg's rational expectations model for a small open economy," Research Memorandum FEW 222, Tilburg University, School of Economics and Management.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    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:1173. 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: https://edirc.repec.org/data/nberrus.html .

    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.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with 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.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (email available below). General contact details of provider: https://edirc.repec.org/data/nberrus.html .

    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.