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Output Variability in an Open-Economy Macro Model With Variance-Dependent Parameters

Staff Report 94 | Published September 1, 1984

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Output Variability in an Open-Economy Macro Model With Variance-Dependent Parameters

Abstract

This paper analyzes the variability of output under money supply and exchange rate rules in an open economy in which the slope of the aggregate supply curve depends on the variances of aggregate demand and market-specific innovations. It demonstrates that results regarding the dominance of one rule over the other when the slope of the aggregate supply curve is constant are reversed when the slope of the aggregate supply curve depends on the variances of innovations and these variances are sufficiently large.