Date of Award
1987
Degree Type
Dissertation
Degree Name
Doctor of Philosophy
Abstract
This thesis sets out a rational-expectations model of an economy in which firms are constrained to finance their advances to labor and their purchases of commodity inputs by borrowing from a domestic banking system, which constitutes the entire financial system of the economy. The major implication of this "financial constraint" is that the supply of output comes to depend positively on the real monetary base.;In the closed economy version of the model, a fully anticipated increase in the rate of growth of the monetary base or an anticipated temporary decrease in the level of the monetary base reduces the equilibrium level of output and affects the real wage rate and the real interest rate. Thus, money is not superneutral and the Fisher effect does not hold. In addition, permanent monetary shocks, mistakenly viewed as temporary, also have real effects.;The open economy version of the model distinguishes between tradable and nontradable goods. Here it is shown that the effect of changes in the exogenous variables on the levels of output can be decomposed into a "financial constraint effect" and a "relative price effect".;Under flexible exchange rates, the financial constraint effect always dominates the relative price effect. Hence, any monetary changes that leads to a decrease in output in the closed economy case, also leads to a decrease in the levels of output of both goods in the flexible exchange rate case. In addition, a permanent monetary decrease, mistakenly viewed as temporary, causes the exchange rate to "overshoot" relative to its full current information level.;Under fixed exchange rates, the output effects of anticipated changes in exogenous variables depend on the importance of the financial constraint effect as compared to the relative price effect. If the financial constraint effect is strong enough, an anticipated rise in the level of the government debt will increase the output of both commodities, while an anticipated rise in the price level of the tradable good or an anticipated devaluation will reduce them. Finally, neither unanticipated changes in the price level of the tradable good, nor an unanticipated devaluation affect the current level of output of either commodity. Both might lead to a contraction of output of both commodities in subsequent periods, however.
Recommended Citation
Rojas-suarez, E Liliana, "Price And Output Fluctuations In An Economy With A Limited Capital Market" (1987). Digitized Theses. 1581.
https://ir.lib.uwo.ca/digitizedtheses/1581