New Keynesian Theory, Exchange Rate Regimes, and Research Designs

What is it about?

Some countries like the USA allow the values of their currencies to be determined entirely by forces of demand and supply (market forces that revolve around international trade or investments). Some other countries allow the values of their currencies to be determined by market forces, but allow for some "stickiness" or non-responsiveness in currency values. Such countries include Nigeria and Euro Zone countries. In this study, I show that while studies of interactions between domestic prices (e.g. exchange rates and inflation) are easily justifiable in countries that allow for stickiness, it is much more difficult to justify such studies in countries that do not allow for stickiness in currency values.

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Why is it important?

This study demonstrates that a research agenda that is appropriate and practical in countries that allow for stickiness in currency values may neither be appropriate nor practical in countries that do not allow for stickiness in currency values. For instance, while Balance of Payments are equilibrium outcomes in countries that allow for stickiness in currency values, they are intermediate outcomes (exchange rates are equilibrium outcomes) in countries that do not allow for stickiness in currency values.

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