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Inflation and Output Dynamics with a Floating Exchange Rate

Metcalfe, J.S. and Peel, David (1979) Inflation and Output Dynamics with a Floating Exchange Rate. European Economic Review, 12 (1). pp. 73-89. ISSN 0014-2921

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Abstract

The purpose of this paper is to extend a simple monetarist model of price output fluctuations in a closed economy to the case of a small open economy with a floating exchange rate. Trade and capital flows are explicitly incorporated into the model, exchange rate expectations and inflation expectations are treated separately and exchange rate expectations are integrated into the demand for money function. The properties of the model are investigated under the limiting cases of perfect capital mobility and zero capital mobility. Stability conditions and short run price-output trade-offs are derived and the conclusions for cyclical output patterns are deduced. It is also shown how the short run movement of the exchange rate deviates from purchasing power parity in a systematic fashion.

Item Type: Article
Journal or Publication Title: European Economic Review
Subjects: H Social Sciences > HB Economic Theory
Departments: Lancaster University Management School > Economics
ID Code: 55816
Deposited By: ep_importer_pure
Deposited On: 13 Jul 2012 15:26
Refereed?: Yes
Published?: Published
Last Modified: 09 Apr 2014 23:47
Identification Number:
URI: http://eprints.lancs.ac.uk/id/eprint/55816

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