Year: 1983
Type: report
Abstract: The volatility of the exchange rate under floating rates can be interpreted in terms of approaches that allow for short term price rigidity as well as in terms of models that consider the magnification effect of new information.This paper combines the two approaches into a unified framework, where the degree to which prices are rigid is determined endogenously.It is shown that the variance of percentage deviations from ppp has an upper bound, and that the relationship between the variance of deviations from ppp and the aggregate variability is not inonotonic.Allowing for a short-run Phillips curve with optimal indexation, it is also demonstrated that a higher price flexibility will reduce deviations from ppp and output volatility.
DOI: 10.3386/w1066
Author: Joshua Aizenman
Institution: University of Pennsylvania
Language: English
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W2891027077