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A Geometric Analysis of Exchange Rate Adjustment Under Static and Rational Expectations

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  • GEORGE FANE

Abstract

This note presents a simple geometric apparatus for analyzing macroeconomic questions relating to small open economies. The particular problem analyzed here for illustrative purposes is the adjustment of a floating exchange rate regime, under both static and rational expectations, to a step increase in the money supply. We consider both an unanticipated immediate increase and an unanticipated announcement of a forthcoming increase. We derive the general criterion which determines whether the exchange rate initially overshoots or undershoots the change required for long‐run equilibrium.

Suggested Citation

  • George Fane, 1982. "A Geometric Analysis of Exchange Rate Adjustment Under Static and Rational Expectations," The Economic Record, The Economic Society of Australia, vol. 58(4), pages 367-374, December.
  • Handle: RePEc:bla:ecorec:v:58:y:1982:i:4:p:367-374
    DOI: 10.1111/j.1475-4932.1982.tb00387.x
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    References listed on IDEAS

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    1. Wilson, Charles A, 1979. "Anticipated Shocks and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 87(3), pages 639-647, June.
    2. Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1161-1176, December.
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