The Real Exchange Rate as a Tool of Commercial Policy

67 Pages Posted: 8 Nov 2001 Last revised: 17 Feb 2002

See all articles by Michael L. Mussa

Michael L. Mussa

International Monetary Fund (IMF) - Research Department; National Bureau of Economic Research (NBER)

Date Written: March 1985


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

Mussa, Michael L., The Real Exchange Rate as a Tool of Commercial Policy (March 1985). NBER Working Paper No. w1577, Available at SSRN:

Michael L. Mussa (Contact Author)

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