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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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.

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Journal Article
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European Economic Review
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13 Jul 2012 14:26
Last Modified:
21 Nov 2022 22:31