This paper examines a model of exchange rate dynamics which incorporates sluggish output adjustment into the Dornbusch variable output model. In this model where both the price level and output cannot jump, the interest rate must decline in response to a monetary expansion so as to maintain...

This paper employs two small, open economy macro models of exchange rate determination - a portfolio balance model and an asset market model ¨C to examine implications of endogenous currency substitution on exchange rate volatility arising from monetary and fiscal policies. It is shown that, in...