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

37 Pages Posted: 12 Apr 2004 Last revised: 8 May 2022

See all articles by Stephen J. Turnovsky

Stephen J. Turnovsky

University of Washington - Institute for Economic Research; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: July 1984

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

Turnovsky, Stephen J., Domestic and Foreign Disturbances in an Optimizing Model of Exchange- Rate Determination (July 1984). NBER Working Paper No. w1407, Available at SSRN: https://ssrn.com/abstract=327126

Stephen J. Turnovsky (Contact Author)

University of Washington - Institute for Economic Research ( email )

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