Stability and Exchange Rate Systems in a Monetarist Model of the Balance of Payments

Abstract

The fixed versus floating exchange rates debate appears destined for as long a life as any of the standing controversies in economics. The standard arguments are outlined by Johnson (1969) and Kindleberger (1969). This paper focuses on the effects of the exchange rate system on economic stability. We construct a simple model in which real disturbances affect the level of output each period and nominal disturbances affect the demand for money, and examine the resultant variability of the rate of consumption and the price level in a single country and in a two-country world under regimes of fixed and of floating exchange rates. These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.

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