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Anyway, Durnbusch created a model with the purpose to explain the behaviour of flexible

exchange rates, a historically new phenomenon at that time, synthesizing and reconciling the

Keynesian and the neoclassical school of thoughts about the behaviour of floating exchange

rates. “Expectations and Exchange Rate Dynamics”

ASSUMPTIONS:

Small (in terms of GDP and interest rate, we are interest rate taker) open economy

1) under flexible exchange rates and perfect capital mobility (K)

Two types of imperfect substitute goods (the smallest variation of r from r* may cause a

2) potentially infinite flow): domestic goods and world goods

R* and P* are exogenous; P and R, are endogenously determined by demand and

3) supply to ensure clearing of the goods market

́ s

M

s d

M = (Money Supply), M = f (y,R)

4) Domestic and foreign financial assets are perfect substitutes once anticipated exchange

5) rates are taken into account. Perfect capital mobility is assumed

Money and international asset markets continuously clear, while the goods market

6) clears only slowly due to short­run price stickiness

long­run equilibrium steady states)

We distinguish between (or in which all

7) adjustment process

endogenous variables are in equilibrium and an in which only the

money and assets markets clear, whereas the goods market features either excess

demands or supplies due to an initial exogenous shock. In the short run (K) prices are

sticky (unemployment), while in the long run (n) they are flexible (full employment).

What matters is what happens in the transition period between short and long run.

The model has 6 main equations and 3 markets:

s

1) L = m – p = money in circulation – price

d

2) L = y – r

φ λ e

́

3) r = r* + E[ ]

e

́

E[ ] = normal exchange rate considering expectations

e e

́ ́ −e ¿

4) E[ ] = (

Ớ all the values with a bar are considered long­run values

d

5) y = u + ­ p) + ­

δ(e γy σr

u = exogenous, (e­p) = price competitiveness of domestic goods, y = exogenous (neoclassical full

employment hypothesis) level of output (supply), r = real interest rate,

and are elasticities , is a semi­elasticity


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Corso di laurea: Corso di laurea in ingegneria gestionale (CREMONA - MILANO)
SSD:
A.A.: 2016-2017

I contenuti di questa pagina costituiscono rielaborazioni personali del Publisher gianfranco.pannia di informazioni apprese con la frequenza delle lezioni di International Economics e studio autonomo di eventuali libri di riferimento in preparazione dell'esame finale o della tesi. Non devono intendersi come materiale ufficiale dell'università Politecnico di Milano - Polimi o del prof Sdogati Fabio.

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