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The Theory of Flexible Exchange Rate Regimes and Macroeconomic Policy

  • Rudiger Dornbusch

Abstract

This paper develops three perspectives on the determination of exchange rates and their interaction with macroeconomic equilibrium and aggregate policies. A long- run view characterizes exchange rate determination in terms of monetary and real factors where the real aspects include an explicit consideration of relative price structures. A short-run or “liquidity” view of the exchange rate emphasizes the role of asset market equilibrium and expectations. A policy view, finally, analyses the effectiveness of aggregate policies and points out that in the short-run nominal disturbances will tend to be transmitted internationally. The paper concludes with an analysis of dual exchange rate systems as a stabilizing policy in the presence of speculative disturbances.

Keywords

Exchange Rate Interest Rate Relative Price Money Demand Forward Rate 
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Copyright information

© The Scandinavian Journal of Economics 1977

Authors and Affiliations

  • Rudiger Dornbusch
    • 1
  1. 1.Massachusetts Institute of TechnologyCambridgeUSA

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