Bhandari's Aggregated Dynamics in an Open Economy: A Reassessment.

In a recent paper, J. S. Bhandari (1983) investigates the effect of introducing elasticity dynamics into an open economy macro model and concludes that volatility in the spot exchange rate is due more to expenditure disturbances than monetary disturbances as in the seminal work of R. Dornbusch. This paper shows that Bhandari's conclusion applies only for a rather special set of parameter configurations and that, in general, anything can happen depending on the parameter values of the model. Copyright 1989 by Blackwell Publishers Ltd and The Victoria University of Manchester