Money Illusion and Exchange Rate Dynamics in a Small Open Economy

Chung-Fu Lai


This paper investigates the role of money illusion on exchange rate dynamics in a small open economy. We find that whether the exchange rate overshoots in response to a monetary shock is not depend on the parameters such as the consumption elasticity of money demand and the degree of openness proposed by Lane (1997), but the phenomenon of money illusion, this is because the degree of correlation between money demand and consumption is lower with the existence of money illusion, hence the exchange rate must present the excessive adjustment in order to re-achieve the new equilibrium position of the money market, exchange rate overshooting takes place.

Full Text:



Research in World Economy
ISSN 1923-3981(Print)ISSN 1923-399X(Online)


Copyright © Sciedu Press

To make sure that you can receive messages from us, please add the '' domain to your e-mail 'safe list'. If you do not receive e-mail in your 'inbox', check your 'bulk mail' or 'junk mail' folders.