45 views

Uploaded by divyajain2888

- Economics Assignment - Currency Values
- L7SlidesBoPIIShortRun (1)
- Case 3.doc
- S2011 - Solution to Test 2 - ECO209 - July 22, 2011
- Mun Dell
- 116804171-Rabin-A-Monetary-theory_311-315
- Innovation in Banking and Excessive Loan Growth
- Diags Need
- 2008 Germany Projections
- US Federal Reserve: ifdp826
- currency.management.pdf
- 9708_s06_qp_1
- Hema
- US Federal Reserve: QualityPricing
- 1 - Slides9_3 - Fixed rates.pdf
- Distance to Frontier Selection Econ Growth
- Natural Rate is Zero[1]
- International pricing
- The Study of the Welfare Effect of the Income Tax and the Excise Tax
- US Federal Reserve: 19780117meeting

You are on page 1of 13

Dornbusch Model

Dornbusch model is a an hybrid: short-run features as

the Mundell-Fleming model and long-run features as

in the Monetary Model.

and they adjust slowly towards the long run equilib-

rium.

ment in goods (slow) and ¯nancial markets (instanta-

neous).

note that in what follows variables are expressed in

logarithms

economy)

Output demand:

y d = h(e + p¤ ¡ p)

+

where q = e + p¤ ¡ p represents the real exchange

rate.

m ¡ p = ky ¡ lr

Aggregate Supply Block: (goods prices are sticky)

diate impact phase, increasingly steep in the adjust-

ment phase and vertical in the long-run.

³ ´

¢p = ¼ yd ¡y

output (full-employment level).

r = r ¤ + ¢ee

Exchange rate expectations mechanism:

So we can substitute to have our ¯nal UIP equation:

r = r¤ + µ (e ¡ e)

Description of long run equilibrium:

no upward or downward pressure on price level.

the exchange rate does not change.

which there is no surplus or de¯cit in the balance of

payment.

to y. So we know that long-run equilibrium will be on

the vertical aggregate supply curve.

2) Since r¤ hasn't change, we know that in the long-

run equilibrium, r = r ¤: our IS and LM curve need

to go back at the original equilibrium. In particular

the increase in money supply requires a proportional

increase in the price level.

change rate, this means that the real exchange rate

has to return to the initial equilibrium.

slowly while ¯nancial markets adjust istantaneously)

in the domestic interest rates (liquidity e®ect) in or-

der to accommodate the excess supply of real money

balances (the excess supply arises because of sticky

prices).

the domestic interest rate is compatible only if there is

an equilibrating change in the nominal exchange rate.

In order to keep domestic assets in their portfolio,

households should expect the nominal exchange rate

to appreciate along the path that goes to the long-run

equilibrium

the nominal exchange rate overdepreciate (overshoot-

ing), so that the domestic currency is so undervalued

that it is expected to appreciate in the future.

rate the IS curve shift outward.

smaller it is the steeper is the LM curve and the

greater the fall in the interest rate resulting from an

increase in real money stock;

-the sensitivity of market expectations to deviations of

the nominal exchange rate from the equilibrium value.

The lower the sensitivity the higher is the required

depreciation.

to push up prices in the domestic economy.

domestic competitive advantage.

This will imply a backward shifting in the LM curve

to its pre-disturbance level. In the process the real

interest rate rises.

rate appreciates at a diminishing rate and IS curve is

shifting back to its initial position (current account

surplus is reduced).

Analytical analysis:

equation

m ¡ p = ky ¡ l [r¤ + µ (e ¡ e)]

p = m ¡ ky + lr ¤ + lµ (e ¡ e)

and from the good market equilibrium

¢p = ¼ (h(e + p¤ ¡ p) ¡ y)

Now in equilibrium:

² aggregate

³ demand

´ is equal to the long run output

level y d = y from which it follows that ¢p = 0:

y

e¡p =

h

Any change in the nominal exchange rate is matched

by a corresponding change in the price level.

² expected changes in the nominal exchange rate is

zero.

p = m ¡ ky + lr ¤

Any change in the money supply is matched by a

corresponding change in the price level

µ ¶

1

e= ¡ k y + m + lr¤

h

implies a long run nominal depreciation and a

long run increase in the price level in the same

proportion;

in a real exchange rate depreciation.

Graphical analysis:

p = m ¡ ky + lr ¤ + lµ (e ¡ e)

= p ¡ lµ (e ¡ e)

¢p = ¼ (h(e + p¤ ¡ p) ¡ y)

= ¼h (q ¡ q)

where q is the long run equilibrium level of the real

exchange rate.

sent the short-run equilibrium and in the long run it

is on the GM line that represents the goods market

equilibrium.

² an increase in m determines a proportional in-

crease in e and p such that q = e ¡ p does not

change ) the GM does not move.

curve outward to MM1.

prices are ¯xed in the short-run, the exchange rate

jumps to the level e2 consistent with the MM1:

sponse to monetary shocks and the economy reaches

point C

from C to B with the exchange rate appreciating

and in°ation decelerating.

Dornbusch model: dynamic following a money supply increase.

e GM

∆p = 0

e2 C

e1

B

e0 A

MM1

MM0

p0 p

- Economics Assignment - Currency ValuesUploaded byAna
- L7SlidesBoPIIShortRun (1)Uploaded byJamie Quirke
- Case 3.docUploaded byLaura H
- S2011 - Solution to Test 2 - ECO209 - July 22, 2011Uploaded bySiddhanth Hiremath
- Mun DellUploaded byAnjaliPunia
- 116804171-Rabin-A-Monetary-theory_311-315Uploaded byAnonymous T2LhplU
- Innovation in Banking and Excessive Loan GrowthUploaded byRobert
- Diags NeedUploaded byapi-26942617
- 2008 Germany ProjectionsUploaded byUtkan Alp
- US Federal Reserve: ifdp826Uploaded byThe Fed
- currency.management.pdfUploaded byjamie8889
- 9708_s06_qp_1Uploaded byicicle_sky
- HemaUploaded byAmrit Tejani
- US Federal Reserve: QualityPricingUploaded byThe Fed
- 1 - Slides9_3 - Fixed rates.pdfUploaded byHenry Tian
- Distance to Frontier Selection Econ GrowthUploaded byNathaniel Boluarte D
- Natural Rate is Zero[1]Uploaded byNathan Martin
- International pricingUploaded bySelva Kumar Krishnan
- The Study of the Welfare Effect of the Income Tax and the Excise TaxUploaded byAlbert Dearborne Ebo Quansah
- US Federal Reserve: 19780117meetingUploaded byThe Fed
- Macroeconomics AssignmentUploaded byBaranidharan Mohan
- 321 Ch18A-2Uploaded byCeline Yap
- INB 301. Jute FinalUploaded byÖhöňå Étû
- Labor 98Uploaded byRAJAT SHARMA
- Topic 4 Market Equilibcrium (Student)Uploaded byseanhongwei
- Gentrification as an End GameUploaded byGuillermo Olivera
- Chapter 19 summary.docUploaded byJessica Jess
- Econ+233+-+Quiz+3.docxUploaded byYounas Khan
- 5918076Uploaded byWilson Koh
- Foreign Exchange MarketUploaded byvishvajitj

- Formulae and EquationsUploaded byFranco Martin Mutiso
- Chapter 16 ProblemsUploaded byDaood Abdullah
- Index Dividend Futures: Pricing Strategy and Investment AnalysisUploaded byPriyanka Bhandari
- chapter4-140219121343-phpapp01Uploaded bySandeep Badiganti
- MathsUploaded bySwaapnil Shinde
- Indicator_business_cycleUploaded bydurgesh dhumal
- Fin 370 GeniusUploaded bydavid
- DRMUploaded byYves Espinosa Ytac
- International RiskUploaded bymarjannaseri77
- Rpt Com Costofcapital130203Uploaded byMaqsood Javaid
- Chapter 2 - Factors, Effect of Time & Interest on MoneyUploaded byAsif Hameed
- Userguide for V2.01cUploaded bymacpepito
- Sbi Car LoanUploaded byShweta Yashwant Chalke
- Applicable Federal Interest Rates for Tax Purposes -- Rev. Rul. 2013-12Uploaded bytaxcrunch
- R50_Economics_and_Investment_Markets_Q_Bank.pdfUploaded byZidane Khan
- Tutorial 6 AnswersUploaded byMaria Mazurina
- Aero expoUploaded byDhannaram Rakesh
- Elasticity Approach to the Balance of PaymentUploaded byMd Najmus Saquib
- 2. Keynes v. the ‘Old’ Classical ModelUploaded byRamine Tomaz Nelo
- DocumentUploaded byjessel
- Phil Hunt , Joanne Kennedy , Antoon Pelsser - Markov-functional interest rate models.pdfUploaded byChun Ming Jeffy Tam
- ExFinal-Carlos Vallejos Claudio Rainier LuisUploaded byVictors Palomino Asencio
- Diageo CaseUploaded byMeena
- for printing high school handoutUploaded byapi-321353576
- FulksUploaded byNirav Parikh
- Ch5 - SolutionsUploaded bychama2020
- ct82010-2014Uploaded byyuva843
- Limitations of the IS-LM Model.Uploaded byAnwesha Ghosh
- aimr - life cycle investing and education.pdfUploaded byAnonymous Mgq9dupC
- macroeconomics Chapter 1Uploaded byxiaosheegwah