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| Author: | Monacelli, T. |
| Title: | Into the Mussa puzzle: monetary policy regimes and the real exhchange rate in a small open economy |
| Journal: | Journal of International Economics
2004 : JAN, VOL. 62:1, p. 191-217 |
| Index terms: | Exchange rates Monetary policy |
| Language: | eng |
| Abstract: | Industrial countries moving from fixed to floating exchange rate regimes experience dramatic rises in the variability of the real exchange rate. This evidence, forcefully documented by Mussa (1987) is a puzzle because it is hard to reconcile with the assumption of flexible prices. This article lays out a dynamic general equilibrium model of a small open economy that combines nominal price rigidity with a systematic behaviour of monetary policy able to approximate a continuum of exchange rate regimes. A version of the model with complete exchange rate pass-through is broadly consistent with Mussa's findings. |
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