Money and Exchange-Rate Adjustments in an LDC Context

Abstract

The paper presents theoretical models designed to examine, first, the links between a monetary expansion and the collapse of a fixed exchange rate, and second, the behavior of the real exchange rate following a devaluation. Under a free float, a monetary expansion leads to an appreciation in the long-run. If the monetary authority intervenes to prevent the depreciation, then foreign reserves decline to restore asset-market equilibrium.