Exchange Rate Dynamics with Sluggish Prices Under Alternative Price-adjustment Rules

Download or read book Exchange Rate Dynamics with Sluggish Prices Under Alternative Price-adjustment Rules written by Maurice Obstfeld and published by . This book was released on 1983 with total page 40 pages. Available in PDF, EPUB and Kindle. Book excerpt: 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.