Exchange rates, capital mobility and currency substitution /
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| Other Authors: | , , |
| Format: | Thesis Book |
| Language: | English |
| Published: |
1992.
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| Subjects: | |
| Online Access: | Link to OAKTrust copy |
| Abstract: | This dissertation provides an analysis of exchange rates determination under a monetary rule and the determination of the dual exchange rate under an exchange rate rule. It considers two alternative models in which residents can hold assets denominated in terms of foreign exchange: interest bearing assets (the case of capital mobility) or noninterest bearing assets (the case of currency substitution). It explores the economics of the response of exchange rates or dual exchange rates to monetary policies in a small open economy by adopting the explicit optimization approach on the part of economic agents. For the case of a monetary rule, Dornbusch's(1976a) work (which shows the overshooting phenomena of exchange rates with perfect capital mobility in the presence of a sluggish adjustment in the goods market) is extended in the context of optimization approach. We show that the overshooting always occurs following an increase in the rate of monetary expansion, irrespective of the relative size of income and price elasticities. The case of currency substitution is also considered, allowing price rigidity in short run. Whether the exchange rate overshoots or not depends on whether the two monies are Edgeworth substitutes or not. If the two monies are Edgeworth complements, the nominal appreciation of domestic currency at the time of the monetary expansion is necessary since the price cannot adjust immediately at that time. The case of an exchange rate rule in the presence of restrictions to convertibility provides the most novel results in dual exchange rate determination when we allow residents to hold foreign currency. Under restricted convertibility, the central bank is willing to buy foreign exchange at the official rate, but it sells foreign exchange only for purposes of importing goods and services. On the other hand, arbitrage prevents the dual exchange rate to be lower than the official rate... |
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| Item Description: | Typescript (photocopy). Vita. "Major subject: Economics." |
| Physical Description: | vii, 83 leaves : illustrations ; 29 cm |
| Bibliography: | Includes bibliographical references. |