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- Ahtiala, Pekka
(author)
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A Synthesis of the Macroeconomic Approaches to Exchange Rate Determination
- 1983
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Reports (other academic/artistic)abstract
- The paper develops a general model with the goods, money, bond, and labor markets. The special assumptions needed to generate the predictions of the Keynesian, monetarist, and portfolio balance approaches from the model are then found. It turns out that the assumtion of perfect capital mobility essentially generates the monetarist predictions, and perfect monetary sterilization by the central bank at a fixed interest rate the predictions of the elasticity-absorption approach. The supply side regime and purchasing-power parity assumptions fix income but do not qualitatively affect the exchange rate responses. The approaches turn out to be independent, rather than contradictory parts of the general model, each approach abstracting from what the other is analysing. This is technically done by dichotomizing the general model, the monetarists making the money market equation, and the Keynesians the goods market and balance payments equations the independent ones. The orthodox neutral monetary policy version of the Keynesian approach generates the predictions of the whole model. While the Keynesian and monetarist approaches differ in their policy regime assumptions, the portfolio balance approach differs in its equilibrium condition, by constraining the trade balance to equilibrium.
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