DP152 The Price, Output and Exchange Rate-Overshooting Effects of Monetary, Fiscal and Exchange Intervention Policy in a Two-Country Disequilibrium Model

Author(s): Neil Rankin
Publication Date: January 1987
Keyword(s): Disequilibrium Models, Exchange Rates Overshooting Monetary Policy, Fiscal Policy, Wage Rigidity
JEL(s): 131, 134, 311, 321, 431
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=152

Monetary, fiscal and exchange intervention policy are examined in a symmetric, two-country, two-period model. Money wages are rigid in period one, causing unemployment. In each period there is a single world output, traded in a perfectly competitive world market. The exchange rate is flexible, and there is perfect capital mobility with perfect foresight. Aoki's method is used to obtain comparative static results, which include as special cases small open and closed economies. Whereas monetary policy effects in this model are consistent with the Mundell-Fleming-Dornbusch framework, fiscal policy always causes higher domestic output and a nominal depreciation, and may well lower foreign output.