Exchange Rate Dynamics in a General Equilibrium Model with Decreasing Returns to Labor

Allan Bødskov Andersen ()
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Allan Bødskov Andersen: Danmarks Nationalbank, Postal: Havnegade 5, 1093 København K, Denmark

No 00-12, Finance Working Papers from University of Aarhus, Aarhus School of Business, Department of Business Studies

Abstract: We develop an extension to the Obstfeld and Rogoff (1995, 1996) two sector model with imperfect competition and norminal wage rigidities. Contrary to the Obstfeld and Rogoff (1995, 1996) analysis, we assume that technology exhibits decreasing returns to scale. We analyze the implications for the exchange rate's reaction to an unexpected permanent rise in the money supply. The model replicates an overshooting result for certain parameter values, and we are able to isolate the effect of decreasing returns on the exchange rate. The exchange rate overshootes less compared to the situation in Obstfeld and Rogoff (1995, 1996), in which there is constant returns to scale.

Keywords: Monopolistic competition; Norminal rigidities; Exchange rates; Overshooting (search for similar items in EconPapers)
Date: Written 2000-08-01

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