TITLE

ADJUSTMENT IN EXCHANGE RATE, INTEREST RATE, AND PRICE LEVEL BY ECONOMIC FORCES

AUTHOR(S)
ESTOLA, Matti
PUB. DATE
January 2012
SOURCE
Hyperion International Journal of Econophysics & New Economy;2012, Vol. 5 Issue 1, p41
SOURCE TYPE
Academic Journal
DOC. TYPE
Article
ABSTRACT
We model the exchange rate of the currency of a relatively small country vis-à-vis to euro. To construct a complete model for the financial system, the dynamics of interest rate and average price level are modeled too. We show that the exchange rate changes due to imbalances in that part of the balance of payments of the home country, charged in Euros, if the central bank does not sterilize these impulses. The adjustment in the exchange rate, the interest rate, and average price level may be monotonous or oscillating, and the equilibrium may be stable or not. In our model, overshooting takes place in stable cases as compared with Dornbush's (1976) unstable equilibrium. The possible equilibrium exchange rate is shown to be conditional on investors' expectations of its future value.
ACCESSION #
91526527

 

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