Money, Crises, and Transition: Essays in Honor of Guillermo by Carmen M. Reinhart

By Carmen M. Reinhart

Essays by way of in demand students and policymakers honor some of the most influential macroeconomists of the final thirty years, discussing the subjects in the back of his paintings.

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That result also holds in the Devereux-Engel (2003) model with no nontraded goods, as the authors show. Because g ¼ 1 in their setting, however, flex-price consumption responses to technology shocks are symmetrical, and so central banks’ policy responses are absolutely symmetrical as well. That is not the case when g < 1, for then a relatively more forceful Home interest rate intervention is needed to mimic the flexible-price consumption response. Variable international interest-rate differentials imply exchange-rate variation, however, even though the exchange rate has no expenditure switching effects between Home and Foreign goods in this model.

1993. ’’ Journal of International Economics 35: 297–316. Benigno, Gianluca, and Pierpaolo Benigno. 2003. ’’ Review of Economic Studies 70: 743–764. ———. 2008. ’’ Journal of International Money and Finance 27, in press. , and Carmen M. Reinhart. 2002. ’’ Quarterly Journal of Economics 117: 379–408. , and Charles Engel. 2003. ’’ Review of Economic Studies 70: 765–783. Duarte, Margarida. 2004. ’’ Federal Reserve Bank of Richmond Economic Quarterly 90: 21–40. Duarte, Margarida, and Maurice Obstfeld.

18 disclose the key difference in consumption dynamics between the flexible and fixed-price cases. 18 shows that the responses of consumption are muted whenever l < 1. Why? 18, current consumption therefore can adjust fully with no change in the real rate of interest. When l < 1, however, consumption is mean-reverting, and current consumption can adjust to its flex-price level only if the real interest rate falls. In the flexible-price case, pt indeed does fall, creating a lower real interest rate both through higher expected inflation and through the associated policy-induced fall in the nominal interest rate it .

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