Exchange Rate Dynamics with Sluggish Prices Under Alternative Price Adjustment Rules

Abstract

Recent research on the asset-market approach to exchange rates has incorporated short-run Keynesian price rigidities into models assuming rational expectations. These sticky-price models generally exhibit classical properties in the long run, but allow for temporary goods-market disequilibrium in response to real and monetary shocks taht are less than perfectly anticiapted. A critical element in these models is the mechanism determining how domestic goods prices adjust over time in response both to current and disequilibrium and to expectations of future events.