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The Real Exchange Rate as a Tool of Commercial Policy


  • Michael Mussa


This paper develops a dynamic, rational expectations model that generalizes both the standard, two-country, two-commodity model of real trade theory and the "dependent economy" model of open economy macroeconomics. This model is used to show how a variety of government policies can affect the real exchange rate (defined as the relative price of domestic goods in terms of foreign goods) and thereby replicate some of the effects of commercial policy. The policies considered include temporary and expected future shifts in the distribution of government spending, temporary general tax reductions financed by the issuance of government debt, controls on international capital movements, and policies that combine a fixed path of the nominal exchange rate and a fixed path of the nominal money supply (supported by sterilized official intervention in the foreign exchange market).

Suggested Citation

  • Michael Mussa, 1985. "The Real Exchange Rate as a Tool of Commercial Policy," NBER Working Papers 1577, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:1577
    Note: ITI IFM

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    References listed on IDEAS

    1. Barro, Robert J, 1974. "Are Government Bonds Net Wealth?," Journal of Political Economy, University of Chicago Press, vol. 82(6), pages 1095-1117, Nov.-Dec..
    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. 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.
    4. Razin, Assaf & Svensson, Lars E. O., 1983. "Trade taxes and the current account," Economics Letters, Elsevier, vol. 13(1), pages 55-57.
    5. Obstfeld, Maurice, 1983. "Intertemporal price speculation and the optimal current-account deficit," Journal of International Money and Finance, Elsevier, vol. 2(2), pages 135-145, August.
    6. W. E. G. Salter, 1959. "Internal And External Balance: The Role Op Price And Expenditure Effects," The Economic Record, The Economic Society of Australia, vol. 35(71), pages 226-238, August.
    7. T. W.Swan, 1960. "Economic Control In A Dependent Economy," The Economic Record, The Economic Society of Australia, vol. 36(73), pages 51-66, March.
    8. Dornbusch, Rudiger, 1975. "Alternative Price Stabilization Rules and the Effects of Exchange Rate Changes," The Manchester School of Economic & Social Studies, University of Manchester, vol. 43(3), pages 275-292, September.
    9. Blanchard, Olivier J, 1985. "Debt, Deficits, and Finite Horizons," Journal of Political Economy, University of Chicago Press, vol. 93(2), pages 223-247, April.
    10. Robert A. Mundell, 1960. "The Public Debt, Corporate Income Taxes, and the Rate of Interest," Journal of Political Economy, University of Chicago Press, vol. 68, pages 622-622.
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    Cited by:

    1. Staiger, Robert W. & Sykes, Alan O., 2010. "‘Currency manipulation’ and world trade," World Trade Review, Cambridge University Press, vol. 9(04), pages 583-627, October.
    2. Drabek, Zdenek & Brada, Josef C., 1998. "Exchange Rate Regimes and the Stability of Trade Policy in Transition Economies," Journal of Comparative Economics, Elsevier, vol. 26(4), pages 642-668, December.

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