PPP Exchange-Rate Rules and Macroeconomic Stability

Bibliographic Data

ID10171267
AuthorsRüdiger Dornbusch (corresponding author)
Year1982
Volume90
Issue1
Pages158-165
Publication date1982-02-01
Open AccessNo
TypeARTICLE
VenueJournal of Political Economy (JOURNAL)
Journal identifiersISSN: 0022-3808 • E-ISSN: 1537-534X
PublisherUniversity of Chicago Press (PUBLISHER • US)
DOI10.1086/261044
OpenAlexW4230263461
LanguageEN
Citations received6

Exchange-rate rules that link exchange depreciation to domestic price-level changes are shown to affect the output price-level stability trade-off through two separate channels. On one hand a PPP-oriented exchange-rate policy tends to maintain constant the real exchange rate, thus stabilizing demand. But the exchange-rate policy works also through the supply side, via the prices of imported intermediate goods. Here exchange-rate indexation works to amplify the effect of wage disturbances on prices and potentially on output. In the context of a rational-expectations model with long-term overlapping wage contracts, the analysis shows that the impact of increased indexation on output and price-level stability depends on the extent of monetary accommodation

Context (archaeology · Depreciation (economics · Econometrics · Economics · Exchange rate · Indexation · Inflation (cosmology · Labour economics · Macroeconomics · Microeconomics · Monetary economics · Monetary policy · Price level · Price of stability · Price setting · Rational expectations · Wage · Economic theories and models · Global Financial Crisis and Policies · Monetary Policy and Economic Impact

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