Money and exchange rates in the Grossman-Weiss-Rotemberg model |
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| Authors: | Fernando Alvarez Andrew Atkeson |
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| Affiliation: | aDepartment of Economics, University of Chicago, Chicago, IL 60637, USA;bUniversidad Torcuato di Tella, Buenos Aires, 1428, Argentina;cDepartment of Economics, University of Minnesota, Minneapolis, MN 55455, USA;dNational Bureau of Economic Research, Cambridge, MA 02138, USA |
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| Abstract: | We analyze the impact of monetary policy on inflation, interest rates and exchange rates in a model with segmented asset markets developed by Grossman and Weiss (1983) and Rotemberg (1984, 1985). We find parameters for which real and nominal exchange rates in this model are (1) much more volatile than interest rates, inflation rates, and money growth rates, (2) highly correlated with each other, and (3) highly persistent. While this model fails to match the data in other important respects, it illustrates a potentially useful approach to modelling exchange rate behavior. |
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| Keywords: | Exchange rates Interest rates Liquidity effect Monetary policy Segmented markets |
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