Advertisement

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

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

Abstract

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.

Keywords

Exchange Rate Monetary Policy Real Exchange Rate Government Expenditure Money Supply 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.

Preview

Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.

References

  1. Anderson, P.A. (1979), ‘Rational expectations forecasts from nonrational models’, Journal of Monetary Economics, 5, pp. 67–80.CrossRefGoogle Scholar
  2. Artis,M.J. and D.A.Currie (1981), ‘Monetary targets and the exchange rate: a case for conditioning targets’ in W.A. Eltis and P.J.N. Sinclair (1981).Google Scholar
  3. Artis, M.J. and E. Karakitsos (1982), ‘Monetary and exchange rate targets in an optimal control setting’, PROPE Discussion Paper No. 30, Imperial College, University of London.Google Scholar
  4. Ball, R.J., T. Burns and P.J. Warburton (1979), ‘The London Business School model of the U.K. economy: an exercise in international monetarism’, in P. Ormerod (ed), Economic Modelling, Heinemann, London.Google Scholar
  5. Baum, C.F. (1980), ‘On the sensitivity of optimal control solutions’, Journal of Economic Dynamics and Control, 2, pp. 205–208.CrossRefGoogle Scholar
  6. Beenstock, M., A. Budd and P.J.Warburton (1981), ‘Monetary policy, expectations and real exchange rate dynamics’, in Eltis and Sinclair (1981).Google Scholar
  7. Beenstock, M. and G. Dicks (1983), ‘An aggregate monetary model of the worl economy’, European Economic Review, 20, pp. 261–286.CrossRefGoogle Scholar
  8. Brandsma, A.S. and A.J Hughes Hallett (1984), ‘Noncausalities and time inconsistency in dynamic noncooperative games: the problem revisited’, Economics Letters, 14, pp. 123–130.CrossRefGoogle Scholar
  9. Buiter,W.H. (1981),’ saddlepoint problems in rational expectations models’, University of Bristol (mimeographed).Google Scholar
  10. Buiter,W.H. and M.H. Miller (1981), ‘Monetary policy and international competitiveness: the problems of adjustment’, in Eltis and Sinclair (1981).Google Scholar
  11. Chow, G. (1975), Analysis and Control of Dynamic Economic Systems, John Wiley, New York.Google Scholar
  12. Chow, G. (1980), ‘Economic policy evaluation and optimisation under rational expectations’, Journal of Dynamic Economics and Control, 2, pp. 1–13.CrossRefGoogle Scholar
  13. Dornbusch, R. (1976), ‘Exchange rate dynamics’, Journal of Political Economy, 84, pp. 1161–1176.CrossRefGoogle Scholar
  14. Driffill,E.J. (1982), ‘Optimal money and exchange rate policies’, Greek Economic Review, Dec. 1982, 1*.Google Scholar
  15. Eltis, W.A. and P.J.N. Sinclair (eds.) (1981), The Money Supply and the Exchange Rate, Clarendon Press, Oxford.Google Scholar
  16. Fair, R.C. (1979), ‘An analysis of a macroeconomic model with rational expectations in the bond and stock markets’, American Economic Review, 69, pp. 539–552.Google Scholar
  17. Holly, S. (1983), ‘Dynamic inconsistency and dynamic games in intertemporal optimisation models: a resolution of the Kydland and Prescot conundrum’, CEF Discussion Paper No. 108, London Business School.Google Scholar
  18. Holly, S. and M.B. Zarrop (1983), ‘On optimality and time inconsistency when expectations are rational’, European Economic Review, 20, pp. 23–40.CrossRefGoogle Scholar
  19. Hughes Hallett, A.J. and H.J.B. Rees (1983), Quantitative Economic Policies and Interactive Planning, Cambridge University Press, Cambridge and New York.Google Scholar
  20. Kydland, F. and E. Prescott (1977), ‘Rules rather than discretion: the inconsistency of optimal plans’, Journal of Political Economy, 83, pp. 473–490.CrossRefGoogle Scholar
  21. Lipton, D.,J. Poterba, J. Sachs and L. Summers (1982), ‘Multiple shooting in rational expectations models’, Econometrica, 50, pp. 1329–1333.CrossRefGoogle Scholar
  22. LBS (1982), ‘London Business School Econometric Model: a technical manual’, London Business School (mimeographed).Google Scholar
  23. Lucas, R.E. (1976), ‘Econometric policy evaluation: a critique’, in K. Brunner and A. Meltzer, The Phillips Curve and Labour Markets, North Holland, Amsterdam.Google Scholar
  24. Tse, E. (1974), ‘Adaptive dual control methods’, Annals of Economic and Social Measurement, 3, pp. 65–84.Google Scholar
  25. Wilson, C.A. (1979), ‘Anticipated shocks and exchange rate dynamics’, Journal of Political Economy, 87, pp. 639–647.CrossRefGoogle Scholar

Copyright information

© Martinus Nijhoff Publishers. Dordrecht/Boston/Lancaster 1984

Authors and Affiliations

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

Personalised recommendations