Finance Discipline Group
UTS Business School
University of Technology, Sydney

Working Paper Series

Monetary and Fiscal Policy Under Nonlinear Exchange Rate Dynamics
Author(s): Carl Chiarella
Date of publication: June 1991
Working paper number: 6
A nonlinear exchange rate model based on the famous Dornbusch (1976) overshhoting model is modified to allow for explicit consideration of the sources of supply and demand in the foreign exchange market along the lines suggested by Kouri (1983). Imperfect substitutability between domestic and foreign assets and finite speed of adjustment are intorduced into the foreign exchnage market. Portfolio considerations dictate that the function describing the fraction of wealth domestic residents desire to hold in foreign assets be nonlinear. The exchange rate dynamics are governed by a set of nonlinear differential equations which exhibit limit cycle behaviour under perfect foresight. A number of fiscal and monetary policies are examined within the framework of the nonlinear model and compared with results with results obtained in the traditional linear mode of analysis.
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Published as: Chiarella, C. 1992, "Monetary and Fiscal Policy Under Non-Linear Exchange Rate Dynamics", in G. Feichtinger (ed), Dynamic Economic Models and Optimal Control, Elsevier, pp. 527-546.
Known citations:

Asada, T., Chiarella, C. and Flaschel, P. 2003, "Interacting Two-Country Business Fluctuations: 'Euroleand and the USA'", Proceedings of the WSEAS International Conference, WSEAS, Athens, Greece.

Asada, T., Chiarella, C., Flaschel, P. and Franke, R. 2003, Interacting Two-Country Business Fluctuations, Working Paper Number: 128, Finance Discipline Group, University of Technology, Sydney, Sydney, Australia.

Chiarella, C., Flaschel, P. and Semmler, W., 2013, Reconstructing Keynesian Macroeconomics: Integrated Approaches, Vol. 2, Routledge.

Chiarella, C. and Khomin, A., 2000, "Learning in a Generalized Dornbusch Model of Exchange Rate Dynamics", Working Paper Number: 102, Finance Discipline Group, University of Technology, Sydney, Sydney, Australia.

Flaschel, P. and Sethi, R. 1999, "Stability in Models of Money and Perfect Foresight: Implications of Non-Linearity", Economic Modelling, 16(2), pp. 221-233.

Lornez, H. 1993, Nonlinear Dynamical Economics and Chaotic Motion, Springer.

Pushnoi, G. S., ????, "Economy as the Complex Adaptive System", Working Paper.