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Domestic and Foreign Disturbances in an Optimizing Model of Exchange- Rate Determination

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  • Stephen J. Turnovsky
Abstract
This paper analyzes the effects of various disturbances of domestic and foreign origin in a small open economy under imperfect capital mobility in which the behavioral relationships are derived from optimization by the private sector. In this model the domestic economy jumps instantaneously to its new equilibrium following a change in either the domestic monetary growth rate or domestic fiscal policy. In response to a disturbance in either the foreign interest rate or inflation rate,the economy undergoes an initial partial jump towards its new equilibrium,which it there after approaches gradually. The implications of these results for exchange rate adjustment and the insulation properties of flexible exchange rates are discussed.

Suggested Citation

  • Stephen J. Turnovsky, 1984. "Domestic and Foreign Disturbances in an Optimizing Model of Exchange- Rate Determination," NBER Working Papers 1407, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:1407
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    References listed on IDEAS

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    1. Maurice Obstfeld, 1982. "Aggregate Spending and the Terms of Trade: Is There a Laursen-Metzler Effect?," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 97(2), pages 251-270.
    2. Obstfeld, Maurice, 1981. "Macroeconomic Policy, Exchange-Rate Dynamics, and Optimal Asset Accumulation," Journal of Political Economy, University of Chicago Press, vol. 89(6), pages 1142-1161, December.
    3. Robert Driskill & Stephen McCafferty, 1980. "Exchange-Rate Variability, Real and Monetary Shocks, and the Degree of Capital Mobility Under Rational Expectations," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 95(3), pages 577-586.
    4. Eaton, Jonathan & Turnovsky, Stephen J, 1983. "Covered Interest Parity, Uncovered Interest Parity and Exchange Rate Dynamics," Economic Journal, Royal Economic Society, vol. 93(371), pages 555-575, September.
    5. Turnovsky, Stephen J. & Brock, William A., 1980. "Time consistency and optimal government policies in perfect foresight equilibrium," Journal of Public Economics, Elsevier, vol. 13(2), pages 183-212, April.
    6. Hodrick, Robert J., 1982. "On the effects of macroeconomic policy in a maximizing model of a small open economy," Journal of Macroeconomics, Elsevier, vol. 4(2), pages 195-213.
    7. Brock, William A & Turnovsky, Stephen J, 1981. "The Analysis of Macroeconomic Policies in Perfect Foresight Equilibrium," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 22(1), pages 179-209, February.
    8. Turnovsky, Stephen J & Bhandari, Jagdeep S, 1982. "The Degree of Capital Mobility and the Stability of an Open Economy under Rational Expectations," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 14(3), pages 303-326, August.
    9. Turnovsky,Stephen J., 1977. "Macroeconomic Analysis and Stabilization Policy," Cambridge Books, Cambridge University Press, number 9780521291873, September.
    10. Rudiger Dornbusch, 1980. "Exchange Rate Risk and the Macroeconomics of Exchange Rate Determination," NBER Working Papers 0493, National Bureau of Economic Research, Inc.
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