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Title: |
Government Expenditure, Foreign Reserves and
the Exchange Rate Dynamics |
| Author: |
Hsu, Chen-Min |
| Author
Affiliation: |
National Taiwan
U |
| Source: |
International Economic Journal, Autumn 1993, v. 7, no. 3, pp. 65-79 |
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Publication Date: |
Autumn 1993 |
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Abstract: |
This paper extends the Sidrauski's
approach to two currencies in a small open economy. Following
Sidrauski's solution procedure, we derive a macroeconomic model that is
usually found in some ad hoc models of perfect foresight. It turns out
that an implicit assumption of fixed future expectations on the future
price inflation is imposed on the household's behavior. We also show
that unexpected and permanent increases in government expenditure cause
the exchange rate to rise. Whether there is initial overshooting in the
exchange rate depends on the relative shifts in "m" [equal to] 0 and "F"
[equal to] 0 schedules. Furthermore, it is shown that when the
government announces its future increases in the government expenditure,
the domestic currency depreciates immediately and the foreign exchange
accumulates thereafter. |
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