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Asset price dynamics, inflation and sectoral composition of output: a dependent economy model

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  • Moumita Basu
  • Nag

Abstract

This article develops a dependent economy model that focuses on the interactions between inflation and asset price dynamics under a flexible exchange rate and rational expectation. We assume that money wage adjusts instantaneously to clear the labour market. The asset prices are represented by the Tobin's q and exchange rate. Using this framework, we will examine implications of monetary policy, fiscal policy, tariff liberalization and exogenous capital flows for inflation and asset prices, which in turn determine the allocation of labour and the sectoral composition of output. The effects of different exogenous and policy-induced shocks critically depend on the difference in the speeds of adjustment in commodity price and asset prices and multiple cross effects generated by changes in these prices.

Suggested Citation

  • Moumita Basu & Nag, 2015. "Asset price dynamics, inflation and sectoral composition of output: a dependent economy model," Macroeconomics and Finance in Emerging Market Economies, Taylor & Francis Journals, vol. 8(3), pages 224-243, November.
    • Handle: RePEc:taf:macfem:v:8:y:2015:i:3:p:224-243
    DOI: 10.1080/17520843.2015.1049639
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    1. Corden, W. Max, 1995. "Economic Policy, Exchange Rates, and the International System," University of Chicago Press Economics Books, University of Chicago Press, edition 1, number 9780226115917, December.
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    3. Buffie, Edward F., 1986. "Devaluation, investment and growth in LDCs," Journal of Development Economics, Elsevier, vol. 20(2), pages 361-379, March.
    4. Maria Tereza Punzi, 2011. "Stabilization Policy and Boom-Bust Cycles - Monetary and Macro-Prudential Rules," Economic Bulletin and Financial Stability Report Articles and Banco de Portugal Economic Studies, Banco de Portugal, Economics and Research Department.
    5. Pattanaik, Sitikantha & Singh, Bhupal, 2012. "Monetary Policy and Asset Price Interactions in India: Should Financial Stability Concerns from Asset Prices be Addressed Through Monetary Policy?," Journal of Economic Integration, Center for Economic Integration, Sejong University, vol. 27, pages 167-194.
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