Abstract
This paper develops three perspectives on the determination of exchange rates and their interaction with macroeconomic equilibrium and aggregate policies. A long- run view characterizes exchange rate determination in terms of monetary and real factors where the real aspects include an explicit consideration of relative price structures. A short-run or “liquidity” view of the exchange rate emphasizes the role of asset market equilibrium and expectations. A policy view, finally, analyses the effectiveness of aggregate policies and points out that in the short-run nominal disturbances will tend to be transmitted internationally. The paper concludes with an analysis of dual exchange rate systems as a stabilizing policy in the presence of speculative disturbances.
I wish to acknowledge helpful comments on an earlier draft from Stanley Black, Stanley Fischer, Jacob Frenkel and Dwight Jaffee. Financial support was provided by a grant from the Ford Foundation.
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© 1977 The Scandinavian Journal of Economics
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Dornbusch, R. (1977). The Theory of Flexible Exchange Rate Regimes and Macroeconomic Policy. In: Herin, J., Lindbeck, A., Myhrman, J. (eds) Flexible Exchange Rates and Stabilization Policy. Palgrave Macmillan, London. https://doi.org/10.1007/978-1-349-03359-1_11
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DOI: https://doi.org/10.1007/978-1-349-03359-1_11
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