Exchange Rate Overshooting, Currency Substitution and Monetary Policy

Athina Zervoyianni

The Manchester School of Economic & Social Studies, 1988, vol. 56, issue 3, 247-67

Abstract: In this paper, the authors introduce the possibility of currency substitution in an extended version of the sticky-price model of exchange-rate behavior, and examine its implications for the behavior of a small, open economy following an (unanticipated) contraction in the domestic money supply. It is shown that currency substitution is, in general, associated with two effects: the "expectations" effect and the "income" effect. The former is "stabilizing" in the sense that it reduces both the possibility that overshooting of the exchange rate takes place at all, as well as the extent to which it occurs if it does occur; the latter effect, however, can be destabilizing. Copyright 1988 by Blackwell Publishers Ltd and The Victoria University of Manchester

Date: 1988
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Persistent link: https://EconPapers.repec.org/RePEc:bla:manch2:v:56:y:1988:i:3:p:247-67

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