Real Adjustment and Exchange-rate Dynamics

J. Peter Neary and Douglas Purvis

The Warwick Economics Research Paper Series (TWERPS) from University of Warwick, Department of Economics

Abstract: This paper presents a model designed to cast some light on the nature of macroeconomic responses to sectoral shocks and to provide a basis for investigation of the interaction between resource allocation and exchange-rate variability. We first develop the implications for the dynamics of the real exchange rate of a Marshallian distinction between short - and long-run supply responses to an endogenous disturbance. Marshall's partial-equilibrium analysis stressed the overshooting of a relative price due to short-run factor fixity ; our analysis derives this result in a general equilibrium context. (However, in the general-equilibrium model it is possible that the long-run price response is perverse so that, rather than overshooting, the short-run relative price response would actually be in the "wrong direction".) We then extend the framework to incorporate the behaviour of money prices in the face of these changing relative prices. The model focusses on monetary equilibrium combined with rational speculation ; the dynamic behaviour of the nominal exchange rate exhibits a straightforward dependence on that of the real exchange rate. But the latter is independent of monetary equilibrium and, in particular, of any speculative behaviour ; any influence of specularors on the nominal exchange rate gives rise to identical movements in the equilibrium nominal price of services.

Pages: 42 pages
Date: 1981
References: Add references at CitEc
Citations: View citations in EconPapers (9)

Downloads: (external link)
https://warwick.ac.uk/fac/soc/economics/research/w ... 78-1988/twerp203.pdf

Related works:
Chapter: Real Adjustment and Exchange Rate Dynamics (1983)
Working Paper: REAL ADJUSTMENT AND EXCHANGE-RATE DYNAMICS (1981)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wrk:warwec:203

Access Statistics for this paper

More papers in The Warwick Economics Research Paper Series (TWERPS) from University of Warwick, Department of Economics Contact information at EDIRC.
Bibliographic data for series maintained by Margaret Nash ().