Exchange Rate Dynamics With Sluggish Prices Under Alternative Price-Adjustment Rules

Maurice Obstfeld and Kenneth Rogoff

No 1173, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper studies exchange rate behavior in models with moving long-run equilibria incorporating alternative price-adjustment mechanisms.The paper demonstrates that price-adjustment rules proposed by Mussa andby Barro and Grossman yield models that are empirically indistinguishable from each other. For speeds of goods-market adjustment that are "too fast," the Barro-Grossman rule appears to induce instability; but we argue that when the ruleis interpreted properly, models incorporating it are dynamically stable regardless of the speed at which disequilibriumis eliminated. The Barro-Grossman pricing scheme is shown to be a natural generalization, to a setting of moving long-run equilibria, of less versatile schemes proposed in earlier literature on exchange rate dynamics.

Date: 1983-08
Note: ITI IFM
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Published as Obstfeld, Maurice & Rogoff, Kenneth, 1984. "Exchange Rate Dynamics with Sluggish Prices under Alternative Price-Adjustment Rules," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 25(1), pages 159-74, February.

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Journal Article: Exchange Rate Dynamics with Sluggish Prices under Alternative Price-Adjustment Rules (1984)
Working Paper: Exchange rate dynamics with sluggish prices under alternative price- adjustment rules (1983)
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