Real Exchange Rate Overshooting and the Output Cost of Bringing Down Inflation
The proposition that under a floating exchange rate regime restrictive monetary policy can lead to substantial "overshooting" of the nominal and real exchange rate is now accepted fairly widely. The fundamental reason is the presence of nominal stickiness or inerta in domestic factor and product markets combined with a freely flexible nominal exchange rate. Current and anticipated future monetary policy actions are reflected immediately in the nominal exchange rate, set as it is in a forward-looking efficient auction market while they are reflected only gradually and with a lag in domestic nominal labour costs and / or goods prices. Nominal appreciation of the currency therefore amounts to real appreciation - a loss of competitivensss. Since in most of the simple analytical models used to analyse the overshooting propositions there is no long-run effect of monetary policy on the real exchange rate, any short-run real appreciation implies an overshooting of the long-run equilibrium. The transitory (but potentially quite persistent) loss of competitiveness is associated with a decline in output below its capacity level. This excessive capacity is one of the channels through which restrictive monetary policy brings down the rate of domestic cost and price inflation.
To our knowledge, this item is not available for
download. To find whether it is available, there are three
1. Check below under "Related research" whether another version of this item is available online.
2. Check on the provider's web page whether it is in fact available.
3. Perform a search for a similarly titled item that would be available.
|Date of creation:||1981|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: +44 (0) 2476 523202
Fax: +44 (0) 2476 523032
Web page: http://www2.warwick.ac.uk/fac/soc/economics/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Liviatan, Nissan, 1980. "Anti-Inflationary Monetary Policy and the Capital Import Tax," The Warwick Economics Research Paper Series (TWERPS) 171, University of Warwick, Department of Economics.
- Tobin, James, 1977.
"How Dead Is Keynes?,"
Western Economic Association International, vol. 15(4), pages 459-68, October.
- Minford, Patrick, 1980. "A rational expectations model of the United Kingdom under fixed and floating exchange rates," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 12(1), pages 293-355, January.
- repec:oup:restud:v:47:y:1980:i:1:p:97-112 is not listed on IDEAS
- Irving B. Kravis & Robert E. Lipsey, 1977.
"Price Behavior in the Light of Balance of Payments Theories,"
NBER Working Papers
0181, National Bureau of Economic Research, Inc.
- Kravis, Irving B. & Lipsey, Robert E., 1978. "Price behavior in the light of balance of payments theories," Journal of International Economics, Elsevier, vol. 8(2), pages 193-246, May.
- Isard, Peter, 1977. "How Far Can We Push the "Law of One Price"?," American Economic Review, American Economic Association, vol. 67(5), pages 942-48, December.
- Buiter, Willem H, 1978. "Short-run and Long-run Effects of External Disturbances under a Floating Exchange Rate," Economica, London School of Economics and Political Science, vol. 45(179), pages 251-72, August.
- Willem H. Buiter & Marcus H. Miller, 1980. "Monetary Policy and International Competitiveness," NBER Working Papers 0591, National Bureau of Economic Research, Inc.
When requesting a correction, please mention this item's handle: RePEc:wrk:warwec:204. 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: (Helen Neal)
If references are entirely missing, you can add them using this form.