On the insulation properties of flexible exchange rates

Stephen J Turnovsky

Revue Économique, 1979, vol. 30, issue 4, 719-746

Abstract: [fre] du taux d'échange flexible crée dans le long terme une protection totale contre la deuxième catégorie de perturbations, en général seulement une protection partielle pourra être réalisée dans le court terme. En fait, le degré de protection variera entre 0 et 100 % et un certain nombre de cas différents sont présentés. [eng] This paper considers the insulation properties of flexible exchange rates in the face of two types of foreign price disturbance : (i) An increase in the (steady) foreign rate of inflation ; (ii) A once-and for-all increase in the foreign price level.. With respect to the former, the general conclusion to emerge is that perfect insulation will resuit in both the short run and steady state if and only if those real foreign variables which impinge on the domestic economy are invariant with respect to the exogenous foreign rate of inflation. Although flexible rates provide complete long-run insulation against the second type of disturbance, in general only partial insulation in the short run will be achieved. Indeed the degree of insulation can vary between 0 % and 100 % and varions cases are discussed.

Date: 1979
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