Flexible Exchange Rate

Abstract

The investigation will be carried out within a small open economy characterized by perfect capital mobility. Let us begin with the foreign sector. e denotes the nominal exchange rate. p is the price of domestic goods, expressed in domestic currency. Similarly p* is the price of foreign goods, expressed in foreign currency. So ep*/p is the real exchange rate. F symbolizes foreign assets denominated in domestic currency. Hence F/p are foreign assets expressed in domestic goods.