Monetary and Fiscal Policies under Flexible Exchange Rates and Perfect Myopic Foresight in an Inflationary World

Abstract

This paper develops a dynamic macroeconomic model under flexible exchange rates and perfect capital mobility in which like much of the recent literature, exchange rate expectations and inflationary expectations play an important role. We discuss both the short-run equilibrium of the system and its steady state which accounts for the dynamics of wealth accumulation. Several of our conclusions are in marked contrast to the corresponding propositions derived from the conventional static model. Three aspects of our specification are mainly responsible for this. These include the assumption of perfect myopic foresight; the related fact that our analysis proceeds in terms of the rate of change of the exchange rate; and the inclusion of real a8set earnings in our definition of real disposable income.

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