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8.2. DORNBUSCH’S DYNAMIC MUNDELL—FLEMING MODEL239appendix) or by the method of undetermined coefficients. 5 Since wecan understand most of the interesting predictions of the model withoutexplicitly solving for the equilibrium, we will do so and simplyassume that we have available the model consistent value of θ suchthatús e = ús. (8.11)Steady-State EquilibriumLet an ‘overbar’ denote the steady-state value of a variable. The modelis characterized by a Þxed steady state with ús = úp =0andī = i ∗ , (8.12)¯p = m − φy + λī, (8.13)¯s = ¯p + 1 [(1 − γ)y + σī − g]. (8.14)δDifferentiating these long-run values with respect to m yieldsd¯p/dm =1,andd¯s/dm = 1. The model exhibits the sensible characteristicthat money is neutral in the long run. Differentiating thelong-run values with respect to g yields d¯s/dg = −1/δ = d(¯s − ¯p)/dg.Nominal exchange rate adjustments in response to aggregate expenditureshocks are entirely real in the long run and PPP does not hold ifthere are permanent shocks to the composition of aggregate expenditures,even in the long run.Exchange rate dynamicsThe hallmark of this model is the interesting exchange rate dynamicsthat follow an unanticipated monetary expansion. 6 Totally differentiating(8.6) but note that p is instantaneously Þxed and y is always Þxed,5 The perfect-foresight solution isθ = 1 2 [π(δ + σ/λ)+p π 2 (δ + σ/λ) 2 +4πδ/λ].6 Thisoftenusedexperimentbringsupanuncomfortablequestion. Ifagentshaveperfect foresight, how a shock be unanticipated?