Optimal Feedback and Feedforward Stabilisation of Exchange Rates, Money, Prices and Output Under Rational Expectations

  • S. Holly
  • R. Corker
Part of the Advanced Studies in Theoretical and Applied Econometrics book series (ASTA, volume 3)


This paper examines the role of an optimal stabilisation policy for output, prices and the exchange rate in an open economy. The market in foreign exchange is assumed to be efficient and forward-looking in the sense of the rational expectations hypothesis, but the domestic goods and labour markets are assumed to respond sluggishly. As was originally stressed by Dornbusch (1976), if in these circumstances a government attempts to reduce the rate of inflation by monetary contraction then the real exchange rate appreciates causing a loss of international competitiveness. Only as the domestic price level adjusts slowly towards its lower equilibrium will the real exchange rate move back towards its previous level.


Exchange Rate Monetary Policy Real Exchange Rate Government Expenditure Money Supply 
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Copyright information

© Martinus Nijhoff Publishers. Dordrecht/Boston/Lancaster 1984

Authors and Affiliations

  • S. Holly
    • 1
  • R. Corker
    • 1
  1. 1.London Business SchoolUK

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