Exchange rate and wage-price dynamics: A theoretical analysis and an econometric investigation |
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| Institution: | 1. Department of Economic Analysis, GRIPICO and ICAE, Complutense University of Madrid, Campus de Somosaguas S/N, 28223, Pozuelo de Alarcón, Madrid, Spain;2. Department of Management and Marketing, Complutense University of Madrid, Campus de Somosaguas S/N, 28223, Pozuelo de Alarcón, Madrid, Spain |
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| Abstract: | This paper is an attempt to analyze inflation dynamics in a small open economy as the result of the interaction between wage and price determination behaviors and the interest rate-exchange rate feedback in the context of Dornbusch's model. An extended version of this model is specified and analyzed formally. Then the model is estimated for five OECD countries using a full information maximum likelihood technique. Finally, simulations of the effect of monetary shocks are presented for four countries. |
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