The Role of Exchange Rate Movements in Transmitting International Disturbances
29 Pages Posted: 15 Feb 2006
Date Written: September 23, 1986
This study reviews the theory of how exchange rate movements affect the transmission across industrial countries of monetary and fiscal policies and of shifts in portfolio preferences. It argues that questions such as whether policies are transmitted positively or negatively under floating rates and whether effects are greater or smaller than when exchange rate movements are offset cannot be determined a priori. The paper reviews the evidence on such effects from large econometric models and presents simulations with a small two-country model. It concludes that the effects predicted by the Mundell-Fleming model do not apply consistently in practice.
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