Introduction
It is agreed that the influential Mudell-Fleming model and the Dornbusch overshooting model play significant roles in practical monetary policies for more than thirty years. Nowadays these significant economic models are still the fundamental theories to build up the monetary policy and to interpret the functions of modern monetary expansion in macroeconomics. However, in view of dynamical complication of the foreign exchange rates, the behaviour of exchange rates still could not be expected directly.
The essay would be developed in three parts. First, the monetarist model and the important paper “official intervention on the Forward Exchange Market” published by R. Mundell and J. Fleming in 1961 analysed the effect of official intervention in exchange rate. Second, considering the masterpiece paper “ Expectation and Exchange Rate Dynamics” published by R. Dornbusch in 1976, the overshooting model made the growth of contemporary monetary policy. Third, even though the monetary expansion is a useful tool to improve macroeconomics, it is still difficult to …show more content…
The most significant point is that the speed adjustment is different between goods markets and asset markets. In Dornbusch model (1976), the dynamic concepts of exchange rates are based on the assumption that the adjustment process of asset and exchange rates markets would be faster than good markets. Therefore, the monetary expansion would depreciate the exchange rate immediately in short term, generating the fluctuating exchange rates and trade balance. Moreover, the price might be rising in the adjustment process, triggering the exchange rate appreciate. If domestic output is not fixed to reflect the level of aggregate demand, the interest rate might be rising, while exchange rate could still depreciate but not
It is agreed that the influential Mudell-Fleming model and the Dornbusch overshooting model play significant roles in practical monetary policies for more than thirty years. Nowadays these significant economic models are still the fundamental theories to build up the monetary policy and to interpret the functions of modern monetary expansion in macroeconomics. However, in view of dynamical complication of the foreign exchange rates, the behaviour of exchange rates still could not be expected directly.
The essay would be developed in three parts. First, the monetarist model and the important paper “official intervention on the Forward Exchange Market” published by R. Mundell and J. Fleming in 1961 analysed the effect of official intervention in exchange rate. Second, considering the masterpiece paper “ Expectation and Exchange Rate Dynamics” published by R. Dornbusch in 1976, the overshooting model made the growth of contemporary monetary policy. Third, even though the monetary expansion is a useful tool to improve macroeconomics, it is still difficult to …show more content…
The most significant point is that the speed adjustment is different between goods markets and asset markets. In Dornbusch model (1976), the dynamic concepts of exchange rates are based on the assumption that the adjustment process of asset and exchange rates markets would be faster than good markets. Therefore, the monetary expansion would depreciate the exchange rate immediately in short term, generating the fluctuating exchange rates and trade balance. Moreover, the price might be rising in the adjustment process, triggering the exchange rate appreciate. If domestic output is not fixed to reflect the level of aggregate demand, the interest rate might be rising, while exchange rate could still depreciate but not