Money, Capital And Exchange Rate Fluctuations

The authors explore how the informational frictions underlying monetary exchange affect international exchange rate dynamics. Using a two-country, two-sector model, they show that information frictions imply a particular restriction on domestic price dynamics and hence on international nominal and real exchange rate determination. Furthermore, if capital is utilized as a factor of production in both production sectors, then there is a further restriction on asset pricing relations (money and capital). As a result, monetary and real outcomes become interdependent in the model. Their perfectly flexible price model is capable of producing endogenously rigid international relative prices in response to technology and monetary shocks.

Provided by: Australian National University Topic: Big Data Date Added: Nov 2010 Format: PDF

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