Inventories, monetary regimes, and exchange rate determination /
| Main Author: | |
|---|---|
| Other Authors: | , , |
| Format: | Thesis Book |
| Language: | English |
| Published: |
1992.
|
| Subjects: | |
| Online Access: | Link to OAKTrust copy |
| Abstract: | Non-perishable consumption goods are added to a simple monetary model of a small open economy. Agents have the option of holding inventories of goods in order to smooth consumption in the anticipation of a future change, such as the reduction in the level of real income. In a model where capital mobility is allowed, there is no role for inventories. When capital mobility is prohibited the choice of whether to smooth consumption with inventories or money depends on: i) the rate of depreciation of inventories relative to that of money; and ii) the policy rule chosen by the central bank. With no capital mobility, the welfare of agents is enhanced by the choice of an exchange rate rule provided the rate of devaluation (inflation) is sufficiently low. The comparative response of fixed and flexible exchange rates is analyzed in a model of a small open economy subject to random real fluctuations. Specifically, a reexamination and reinterpretation of the argument that, in a world without capital mobility, the response to real exogenous shocks is welfare superior under fixed exchange rates is undertaken. It is shown that, when the central bank provides the optimum quantity of money, a system of fixed exchange rates perfectly mimics perfect capital mobility and therefore is welfare superior. When the optimum quantity of money is not provided, fixed exchange rates are a less than perfect substitute for capital mobility, and there are instances in which flexible exchange rates are welfare superior. The importance of the specification of the government's budget constraint is also analyzed in the context of the central bank's selection of the monetary regime. It is shown that in certain cases this specification results in the exchange rate (the price level) being indeterminate. These cases are identified and, where possible, the indeterminacies are resolved. |
|---|---|
| Item Description: | Typescript (photocopy). Vita. "Major subject: Economics." |
| Physical Description: | xi, 111 leaves : illustrations ; 29 cm |
| Bibliography: | Includes bibliographical references. |