Exchange Rate Dynamics with Sluggish Prices Under Alternative Price-Adjustment Rules

29 Pages Posted: 23 Apr 2004 Last revised: 17 Sep 2010

See all articles by Maurice Obstfeld

Maurice Obstfeld

University of California, Berkeley; Peterson Institute for International Economics; National Bureau of Economic Research; Centre for Economic Policy Research

Kenneth Rogoff

Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: August 1983

Abstract

This paper studies exchange rate behavior in models with moving long-run equilibria incorporating alternative price-adjustment mechanisms.The paper demonstrates that price-adjustment rules proposed by Mussa andby Barro and Grossman yield models that are empirically indistinguishable from each other. For speeds of goods-market adjustment that are "too fast," the Barro-Grossman rule appears to induce instability; but we argue that when the ruleis interpreted properly, models incorporating it are dynamically stable regardless of the speed at which disequilibriumis eliminated. The Barro-Grossman pricing scheme is shown to be a natural generalization, to a setting of moving long-run equilibria, of less versatile schemes proposed in earlier literature on exchange rate dynamics.

Suggested Citation

Obstfeld, Maurice and Rogoff, Kenneth S., Exchange Rate Dynamics with Sluggish Prices Under Alternative Price-Adjustment Rules (August 1983). NBER Working Paper No. w1173. Available at SSRN: https://ssrn.com/abstract=305555

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