Monetary and fiscal policies under a flexible exchange rate and perfect foresight

Abstract

This thesis extends the existing literature on the effects of monetary and fiscal policies under a flexible exchange rate regime and perfect foresight. The analysis is conducted .in the context of sluggish adjustment in prices and secular inflation and, in addition, emphasizes the dynamic process of financial wealth accumulation . In doing so , the thesis integrates two alternative approaches in the modelling of systems with an inflationary steady state : first, models which focus on the dynamics of relative prices while limiting the treatment of wealth and portfolio considerations and, second, models which focus on the latter aspects and the process of asset accumulation while ignoring the role of relative prices. A relatively new simulation approach is used in dealing \Vith models containing a ' high- order ' dynamic structure . Through this approach, together with the use of conventional analytical methods, the analysis is carried through a series of models of increasing complexity. The alternative models impose different long-run constraints on the economy , wit h important implications for dynamic stability . A major issue concerns the implications of alternative assumptions regarding the degree of asset substitutability and tradeability for the economy's response to policy shocks . In the various models studied, the short- run and long-run effects of policy actions, as \Veil as the transitional process of adjustment, are examined fully . Particular attention is given to the behaviour of the nominal and real exchange rates .