The effects of foreign disturbances under flexible exchange rates |
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| Authors: | Pekka Ahtiala |
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| Institution: | 1. Department of Applied Economics, National Chung Hsing University, Taiwan;2. Department of Finance, National Chung Hsing University, Taiwan;3. Department of Finance, Asia University, Taiwan;4. Department of Quantitative Finance, National Tsing Hua University, Taiwan;5. Discipline of Business Analytics, University of Sydney Business School, Australia;6. Econometric Institute, Erasmus School of Economics, Erasmus University Rotterdam, the Netherlands;7. Department of Quantitative Analysis and ICAE, Complutense University of Madrid, Spain;8. Institute of Advanced Sciences, Yokohama National University, Japan;1. Alfred-Weber-Institute for Economics, Heidelberg University, Germany;2. Faculty of Economic and Social Sciences, Helmut Schmidt University, Hamburg, Germany;3. Research Area \"Poverty Reduction, Equity, and Development,\" Kiel Institute for the World Economy, Germany;4. KOF Swiss Economic Institute, Switzerland;5. CEPR, United Kingdom;6. Georg-August University, Goettingen, Germany;7. CESifo, Germany;1. School of Public Policy and Management, University of Chinese Academy of Sciences, Beijing 100049, China;2. Business School, Beijing Normal University, Beijing 100875, China;1. School of Economics and Management, Southeast University, Nanjing 210096, Jiangsu Province, PR China;2. Department of Economics, Southern Illinois University, Carbondale, IL, USA |
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| Abstract: | Foreign fiscal expansion has a contractionary, and monetary expansion an expansionary, effect on the small economy in the real wage model. The reverse conclusions hold in the money wage model only if the income elasticity of the demand for money is one or greater. The same results hold also for the stationay state effects. This theory provides an explanation—in the policy mix of the United States—for the recent lacklustre performance of Europe. Under rational expectations, foreign monetary expansion leads to an overshooting appreciation, fiscal expansion leading to several possible exchange rate responses. The new results are produced by consistently specified money demand and import functions, the supply side, and the wealth effect. |
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