Exchange-rate indexation in a monetary model: Theory and evidence |
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Authors: | John McDermott |
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Affiliation: | Department of Economics, University of South Carolina, Columbia SC 29208, USA |
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Abstract: | Using a familiar monetary model with nontraded goods, we derive the stability properties of the price level and reserve stock when the exchange rate is partially or completely indexed to the home price level divided by foreign prices. In the stable case, it is shown that indexing results in a system with properties of both fixed and flexible regimes. Our method is to impose conditions of short-run (but not long-run) equilibrium in a discrete period model. The model is tested with monthly data from Brazil. |
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