Incorporating Inflation into the Model

Farrokh Langdana and Peter T. Murphy
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Farrokh Langdana: Rutgers Business School

Chapter Chapter 11 in International Trade and Global Macropolicy, 2014, pp 253-290 from Springer

Abstract: Abstract We now add inflation into our ISLM-BOP model and explore in greater detail the relationship between exchange rates and interest rates. We see how inflation can manifest itself not only in the consumer price index, but in asset prices, as we explore speculative asset price (SAP) bubbles. We move on to explore how currency pegs can “explode” when the pegging Country A has lashed itself to the currency of a Country B whose economic cycle is out of synch with Country A, with devastating consequences. We see how this played out in Southeast Asia in 1997–1998. The Impossible Trinity tells us that we cannot have a pegged exchange rate, control over interest rates, and perfectly mobile capital. We see that one of the three variables must give. Can a pegged-exchange rate country escape the cycle of boom and bust? We follow the actions of Singapore in the late 1990’s and find an answer.

Keywords: Exchange Rate; Interest Rate; Monetary Policy; Central Bank; Money Supply (search for similar items in EconPapers)
Date: 2014
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Persistent link: https://EconPapers.repec.org/RePEc:spr:sptchp:978-1-4614-1635-7_11

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DOI: 10.1007/978-1-4614-1635-7_11

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