Endogenous real exchange rate fluctuations in an optimizing open economy model
Journal
Journal of International Money and Finance
Journal Volume
19
Journal Issue
2
Pages
185-205
Date Issued
2000
Author(s)
Abstract
This paper constructs a simple intertemporal model of a small open economy inhabited by forward looking agents, in which endogenous fluctuations in the real exchange rate can arise in equilibrium, i.e. fluctuations that are not linked to movements in economic fundamentals. The key condition for the main results is the assumption that the Marshall-Lerner condition does not hold (i.e. that the country's exports and imports are inelastic to its real exchange rate). It is shown that, given that the Marshall-Lerner condition fails, there exist periodic equilibria and/or stationary sunspot equilibria in the neighborhood of the stationary state. © 2000 Elsevier Science Ltd. All rights reserved.
SDGs
Type
journal article