This paper reviews briefly the literature on currency substitution and presents two alternative speci?cations of money demand function which take into account different forms of currency substitution. It demonstrates that the money demand function which separates direct currency substitution...

This paper incorporates a fully-sterilized intervention policy and imperfect capital substitutability into a model characterized by sluggish agragate demand, sticky prices, and rational expectations. It shows that intervention may eliminate overshooting resulting from monetary expansion but may...

This paper presents a general equilibrium model that incorporates three of the most prominent features of the recent floating exchange rate period: (1) rational asset markets; (2)"managed" exchange rates with partial (and variable) sterilization; and (3) the use by policymakers of both purely...

Recent research on exchange rates have incorporated short-run intervention rules into models assuming rational expectations. Most of the papers focus only on a particular intervention rule, either the leaning against the wind policy (nominal exchange rate rule) or the policy of stabilizing the...

While exchange rate dynamics is an important topic in open economy macroeconomics, the standard tool commonly used to introduce exchange rate dynamics - the Dornbusch (1976) seminal paper along with phase diagram - is not well-suited for undergraduate students as most of them do not have yet a...

This paper provides the algebra and a panel diagram to attempt to examine the so-called inflation- unemployment (or Phillips curve, or aggregate supply) example, the most popular example in the literature when introducing the concept of “time inconsistency” or “dynamic inconsistency”....

This paper reviews the literature on the theory of devaluation. The various approaches to the analysis of devaluation that are discussed in the paper are complementary and represent different views of the same phenomenon. Thus, in analyzing the effects of devaluation, one must use a combination...

Real exchange rate volatility and real exchange rate misalignment have welfare costs: they generate incorrect signals that can misallocate resources and reduce economic efficiency. It is difficult to determine, both theoretically and practically, whether a country’s real exchange rate is...

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...