(DP 1989-17) Monetary Policy, Fiscal Policy and Sterilized Intervention in a Model of Exchange Rate and Aggregate-Demand Dynamics

Abstract

This paper incorporates a fully-sterilized intervention policy and imperfect capital substitutability into a model characterized by sluggish agragate demand, sticky prices, and rational expectations. It shows that intervention may eliminate overshooting resulting from monetary expansion but may only dampen overshooting resulting from fiscal expansion.