Exchange rate dynamics and international effects of monetary shocks in monetary, equilibrium models

This paper analyzes the ability of open-economy extensions of Lucas's (1990) liquidity model to explain features of observed nominal and real exchange rate dynamics and responses of key variables to monetary shocks. The two-country models that we consider are inhabited by multi-member households who face cash-in-advance constraints on goods purchases and shocks to each country's technology and money growth rate. Countries are linked by trades in goods and currencies. Qualitative and quantitative implications of the model economies for exchange rate dynamics and behaviors of other key variables are examined.