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

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

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Unformatted text preview: Devaluation and Monetary Policy Are Observationally Equivalent March 25, 2011 The Complete Model • STI G = -250·(w – p) + .2·Y –G c0 –G f0 +1000·r +1690 • CA = 750·(e + p f + τ – p) - .3·Y – G f0 +X + 790 • STI G = CA • m d = m s • m d = p + m d + .001·Y – 2.5·r • (1-d)·(m s – m s T ) = -d·(e – e T ) Using Our Benchmark Numbers I n The Complete Model • G c0 = 160 G f = 40 w = 8 • r = .06 p f = 0 τ = 0 • Y = 1000 X = 0 m d = 3.15 • d = 1/3 e T = .4 m s T = 5 This I s Our Benchmark Model, With Managed Floating, I ntermediate Run • I n Particular, The Managed Floating Parameter, d, Has a Value Of 1/3 • This I s Closer To (Completely) Flexible Exchange Rates, Than I t I s To (Completely) Fixed (Pegged-But- Adjustable) Exchange Rates. Slope Of m s Locus • The Slope Of The m s Locus I s Simple. • The Last Equation I n Our Complete Model I s: • (1-d)·(m s – m s T ) = -d·(e – e T ) • Plugging I n 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 I s: m d m s .4 5 e m Capturing Our Model Of The Small Open Economy I n Terms Of Money Supply And Money Demand, For The Case Of d = 1/3. For This Value The Slope Of m s I s -2. .5 4.95 The Original Form Of The m s Locus • The Form Of The m s Locus I s: – (m s – m s T ) = -½·(e – e T ) • Plugging I n m s T = 5, And e T = .4, This Equation Originally Has The Form: – (m s – 5) = -½·(e – .4) – That I s, m s = - ½·e + 5.2 • Or, More Conveniently, e = -2·m s + 10.4 Slope Of m d Locus • We Want To Show The Connection...
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This note was uploaded on 07/16/2011 for the course ECON 2154 taught by Professor Boyer during the Winter '10 term at UWO.

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

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