The Nonstationarity of Money and Prices in Interdependent Economies

Abstract

In most nations, paths of monetary aggregates and prices consistently depart from stationary trends. This paper shows that this is a fundamental implication when monetary authorities of interdependent countries seek to smooth their home output and prices in the presence of incomplete world output-market integration and structural asymmetries. Using a two-country model with interdependent output supply schedules, we show that this conclusion holds whether the exchange rate floats or is fixed. It also holds if monetary policies are coordinated. Therefore, optimal monetary policy choices by central banks yield stationary paths for money and prices only under very specific conditions.

How US Fiscal and Monetary Policy affect the GDP of Countries with Fixed and Flexible Exchange Rates: Estimates using Korean Data from 1963 to 2022

“…The opposite is found for 1998 through 2022 when Korea had a flexible exchange rate regime -increases in US government spending increased Korea's GDP while increases in US money supply decreased Korea's GDP. These results fit the predictions of the simple large country IS/LM/BP model presented in Daniels and VanHoose (2004). However, these effects appear to be diminishing over time.…”

“…

Daniels and VanHoose (2004) contains a clear explanation of the large country IS/LM/BP model that assumes perfect capital mobility -thus increasing country 1's interest rate will cause capital to flow from country 2 into country 1 putting upward pressure (towards appreciation) on country 1's exchange rate (other currency/country 1's currency) and downward pressure (towards depreciation) on country 2's exchange rate (other currency/country 2's currency). An interesting policy prediction that emerges out of this model is that if country 1 has a flexible exchange rate, then country 1 increasing its money supply will lead to an increase in GDP for countries with fixed exchange rate regimes and decreases in GDP for countries with flexible exchange rate regimes.

…”

“…In the last 20 years, the theoretical literature on international economic coordination has become much more complex than the simple large country IS/LM/BP model presented by Daniels and VanHoose (2004). Benigno and Benigno (2006) develop a model with nominal rigidities, monopolistic competition, and different types of shocks.…”

Exchange Rate And National Output Performances: The Implication On Nigeria’s Economy

“…As the currency depreciates, the demand for export and import will change with increase in elasticity of exports and imports. However, depreciation of exchange rate will bring about more than proportionate effect on trade balance if demand for imports and exports are elastic (Daniels & VanHoose, 2005). The elasticity approach also known as Marshall-Lerner condition is the extension of Bickerdike-Robinson-Metzler (BRM) condition.…”

Does exchange rate volatility influence import commodities of India-US? Evidence from ARDL approach

“…In the systematic review, Ali et al (2014) explains the four approaches namely standard theory of international trade, elasticity approach, keysian absorption approach and monetary approach overview the effect of exchange rate movement on trade. Policymakers apply elasticity approach, as and when economy experiences the trade challenge (Daniels and VanHoose, 2005). Whereas, extending further Marshall Lerner conditions suggests that depreciation of the exchange rate of one country's to other countries will boost the trade balance (for instance; Baharumshah, 2001; Yol and Baharumshah, 2007; Kyereme, 2002).…”