Guirgui’s Orthodox Model as an Improvement and Extension of the Dornbusch’s Model. A New Evidence in International Finance
Dornbusch's model was an attempt to explain the reason of deviation of the exchange rates as a consequence that the purchasing power parity, (PPP), does not hold all the time. The good prices were not flexible in either direction on the IS – LM curve. He tried to explain his model by combining macroeconomic indicators such the money supply with the exchange rate, domestic prices and domestic interest rates. Aggregate demand in the goods market is a function of expenditure, domestic income and domestic interest rate. The model is trying to adjust macroeconomic variables in relation to the exchange rate in order to keep equilibrium and PPP holds. In his model, he showed that the exchange rate overshoots, and there can be a significant deviation from PPP. A possible explanation could be due to irrational speculation. The fact of asymmetric information is not the main reason of this volatility, but the fact that there is no similar monetary and fiscal policy among countries with different currencies. The different policy that is adopted affect the money supply and the market will have to adjust to a new equilibrium. Due to the stickiness of prices of goods, wages are not affected immediately and prices adjust slowly in the short – run. As the time period passes, prices will adjust and be positively sloped in the long – run and smooth the volatility until they reach to a new equilibrium in the goods market. The problem with this model is that the assumptions are not realistic. Guirgui's Orthodox model was an attempt to incorporate the Orthodox principles before designing the model
Year of publication: |
2019
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Authors: | Guirguis, Michel |
Publisher: |
[2019]: [S.l.] : SSRN |
Description of contents: | Abstract [papers.ssrn.com] |
Saved in:
Extent: | 1 Online-Ressource |
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Type of publication: | Book / Working Paper |
Language: | English |
Notes: | Nach Informationen von SSRN wurde die ursprüngliche Fassung des Dokuments March 13, 2019 erstellt Volltext nicht verfügbar |
Source: | ECONIS - Online Catalogue of the ZBW |
Persistent link: https://www.econbiz.de/10012890760
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