REAL EXCHANGE-RATE EFFECTS OF MONETARY SHOCKS UNDER FIXED AND FLEXIBLE EXCHANGE-RATES

We analyze how the real exchange rate effects of monetary and real shocks depend on the exchange rate regime within a two-country rational expectations model with confusion about money and real shocks. The model demonstrates that the real exchange rate effect of unanticipated monetary shocks is negatively related to the variance of the domestically-created money supply growth, and that the effects of increasing domestic money variance on the real exchange rate are less under a fixed rate regime than under a flexible rate regime. © 1990.