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78 CHAPTER 2. SOME USEFUL TIME-SERIES METHODS1.210.80.60.40.20-3.1-2.8-2.4-2.1-1.7-1.4-1.0-0.7-0.30.00.40.71.11.41.82.12.52.8FrequencyFigure 2.4: Scale factor |δ(ω)| 2 for cyclical component in the Hodrick—Prescott Þlter.
Chapter 3The Monetary ModelThe monetary model is central to international <strong>macroe</strong>conomic analysisand is a recurrent theme in this book. The model identiÞes a set of underlyingeconomic fundamentals that determine the nominal exchangerate in the long run. The monetary model was originally developed asa framework to analyze balance of payments adjustments under Þxedexchange rates. After the breakdown of the Bretton Woods system themodel was modiÞed into a theory of nominal exchange rate determination.The monetary approach assumes that all prices are perfectly ßexibleand centers on conditions for stock equilibrium in the money market.Although it is an ad hoc model, we will see in chapters 4 and 9 thatmany predictions of the monetary model are implied by optimizingmodels both in ßexible price and in sticky price environments. Themonetary model also forms the basis for work on target zones (chapter10) and in the analysis of balance of payments crises (chapter 11).A note on notation: Throughout this chapter the level of a variablewill be denoted in upper case letters and the natural logarithm in lowercase. The only exception to this rule is that the level of the interestrate is always denoted in lower case. Thus i t is the nominal interestrate and in logs, s t is the nominal exchange rate in American terms,p t is the price level, y t is real income. Stars are used to denote foreigncountry variables.79
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To Shirley, Laurie, and Leslii
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CONTENTSvii11 Balance of Payments C
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2 CHAPTER 1. SOME INSTITUTIONAL BAC
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10 CHAPTER 1. SOME INSTITUTIONAL BA
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128 CHAPTER 4. THE LUCAS MODELTable
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130 CHAPTER 4. THE LUCAS MODELdisco
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132 CHAPTER 4. THE LUCAS MODEL1.02A
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134 CHAPTER 4. THE LUCAS MODELAppen
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136 CHAPTER 4. THE LUCAS MODELProbl
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138 CHAPTER 5. INTERNATIONAL REAL B
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162CHAPTER 6. FOREIGN EXCHANGE MARK
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208 CHAPTER 7. THE REAL EXCHANGE RA
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230 CHAPTER 8. THE MUNDELL-FLEMING
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264CHAPTER 9. THE NEW INTERNATIONAL
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308 CHAPTER 10. TARGET-ZONE MODELSa
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310 CHAPTER 10. TARGET-ZONE MODELSt
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312 CHAPTER 10. TARGET-ZONE MODELSC
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314 CHAPTER 10. TARGET-ZONE MODELSl
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316 CHAPTER 10. TARGET-ZONE MODELST
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318 CHAPTER 10. TARGET-ZONE MODELSa
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320 CHAPTER 10. TARGET-ZONE MODELSM
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322 CHAPTER 10. TARGET-ZONE MODELSt
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324 CHAPTER 10. TARGET-ZONE MODELS
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326 CHAPTER 10. TARGET-ZONE MODELS
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328 CHAPTER 11. BALANCE OF PAYMENTS
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358 AUTHOR INDEXFama, E.F., 161, 16
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Subject IndexAAbsorption, 16, 230AI
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362 SUBJECT INDEXEfficient capital
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364 SUBJECT INDEXMethod of undeterm
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366 SUBJECT INDEXRisk neutrality, 9
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368 SUBJECT INDEXImpulse response a
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