A Dynamic Model of the Open Economy with Sluggish Output.

This paper incorporates sluggish output adjustment in a model simil ar to R. Dornbusch (1976) and explicitly considers the cases in which a real depreciation of the exchange rate is expansionary and contractionary. It is shown that the exchange rate is likely to portray overshooting g in both cases. When the real depreciation is expansionary, the mode l generates comovements in prices and output that are opposite to those presente d by Dornbusch. In the contractionary depreciation case, there is a unique stable equilibrium path and the economy is likely to experienc e cycles in output and the real exchange rate. Copyright 1988 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.