This paper provides the algebra and a panel diagram to attempt to examine the so-called inflation- unemployment (or Phillips curve, or aggregate supply) example, the most popular example in the literature when introducing the concept of “time inconsistency” or “dynamic inconsistency”....

This paper reviews the literature on the theory of devaluation. The various approaches to the analysis of devaluation that are discussed in the paper are complementary and represent different views of the same phenomenon. Thus, in analyzing the effects of devaluation, one must use a combination...

Real exchange rate volatility and real exchange rate misalignment have welfare costs: they generate incorrect signals that can misallocate resources and reduce economic efficiency. It is difficult to determine, both theoretically and practically, whether a country’s real exchange rate is...

This paper examines a model of exchange rate dynamics which incorporates sluggish output adjustment into the Dornbusch variable output model. In this model where both the price level and output cannot jump, the interest rate must decline in response to a monetary expansion so as to maintain...

This paper employs two small, open economy macro models of exchange rate determination - a portfolio balance model and an asset market model ¨C to examine implications of endogenous currency substitution on exchange rate volatility arising from monetary and fiscal policies. It is shown that, in...

This paper, using the different alternative methods of dynamic optimization - the Lagrange/Kuhn-Tucker (LKT) method, the substitution method, the Hamiltonian method, and the dynamic programming approach - derives the conditions that must be satisfied by the solution to the so-called Ramsey...

While exchange rate dynamics is an important topic in open economy macroeconomics, the standard tool commonly used to introduce exchange rate dynamics - the Dornbusch (1976) seminal paper along with phase diagram - is not well-suited for undergraduate students as most of them do not have yet a...