Short-Run and Long-Run Dynamics of Exchange Rates with Sticky Prices

Gonyung Park

Review of International Economics, 1997, vol. 5, issue 4, 478-91

Abstract: This paper constructs microfoundations for the nexus between sticky goods prices and exchange rate overshooting. Based on an asset-pricing model, this paper describes how the exchange rate responds to a monetary shock in the short run and adjusts in later periods to a new long-run rate. In an environment where goods prices are sticky, the short-run response of the exchange rate to a monetary shock depends on the elasticity of consumption demand. The long-run exchange always shifts, equiproportionately to a monetary shock regardless of the parameter values and is reached many periods after the shock. Copyright 1997 by Blackwell Publishing Ltd.

Date: 1997
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