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11-03-25-Devaluation and Monetary Policy Are Observationally Equivalent

# 11-03-25-Devaluation and Monetary Policy Are Observationally Equivalent

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Devaluation and Monetary Policy Are Observationally Equivalent March 25, 2011

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The Complete Model STIG = -250·(w – p) + .2·Y –G c0 –G f0 +1000·r +1690 CA = 750·(e + p f + τ – p) - .3·Y – G f0 +X 0 + 790 STIG = CA m d = m s m d = p + m d 0 + .001·Y – 2.5·r (1-d)·(m s – m s T ) = -d·(e – e T )
Using Our Benchmark Numbers In The Complete Model G c0 = 160 G f = 40 w = 8 r = .06 p f = 0 τ = 0 Y = 1000 X 0 = 0 m d 0 = 3.15 d = 1/3 e T = .4 m s T = 5

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This Is Our Benchmark Model, With Managed Floating, Intermediate Run In Particular, The Managed Floating Parameter, d, Has a Value Of 1/3 This Is Closer To (Completely) Flexible Exchange Rates, Than It Is To (Completely) Fixed (Pegged-But- Adjustable) Exchange Rates.
Slope Of m s Locus The Slope Of The m s Locus Is Simple. The Last Equation In Our Complete Model Is: (1-d)·(m s – m s T ) = -d·(e – e T ) Plugging In d = 1/3, This Equation Becomes: 2/3·(m s – m s T ) = -1/3·(e – e T ) Or: (m s – m s T ) = -1/2·(e – e T ) With e On The Vertical Axis, And m On The Horizontal Axis, The Slope Of The m s Locus Is:

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m d m s .4 5 e m Capturing Our Model Of The Small Open Economy In Terms Of Money Supply And Money Demand, For The Case Of d = 1/3. For This Value The Slope Of m s Is -2. .5 4.95
The Original Form Of The m s Locus The Form Of The m s Locus Is: (m s – m s T ) = -½·(e – e T ) Plugging In m s T = 5, And e T = .4, This Equation Originally Has The Form: (m s – 5) = -½·(e – .4) That Is, m s = - ½·e + 5.2 Or, More Conveniently, e = -2·m s + 10.4

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Slope Of m d Locus We Want To Show The Connection Between m d And e.
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