Slides for International Finance - American University · Money Short Run vs. Long Run Slides for...

MoneyShort Run vs Long Run

Slides for International FinanceKrugman and Obstfeld Chapter 14

Alan G Isaac

American University

2010-09-23

Alan G Isaac Slides for International Finance


Introductory Concepts

Preview

Defining money

Policy control of the money supply

Determinants of the demand for monetary assetsInterest rate determination

equilibrium in the money market

Exchange rate determination reduxLinking the money market and FX market

Long run effects of money supply changesprices interest rates and exchange rates




Money

Different groups of assets may be classified as money

Money assets that are commonly used as a means of paymentCurrency and checking accounts form a useful definition ofmoneyBank deposits in the foreign exchange market are excluded fromthis definition

M1 currency held by public + checkable depositshttpresearchstlouisfedorgfred2categories24




M1

Source httpresearchstlouisfedorgfred2seriesM1SLcid=25




Monetary Authority

Monetary authority the institution authorized to set monetary policymost often a central bank

A monetary authority can fairly directly control

the high-powered money stock

the interbank lending rate (eg Fed funds rate)

These policy actions determine ldquothe supply of moneyrdquo (eg M1)




Fed Funds




Monetary Base




Monetary Authority

US the Federal Open Market Committee (FOMC) of the FederalReserve System (the seven members of the Board of Governorsof the Federal Reserve System plus five Fed bank presidents)

EU monetary policy defined by the Governing Council (like theFOMC includes the Executive Board of the ECB which isanalogous to the Fedrsquos Board of Governors)httpwwwecbintecborgadecisionsgovchtmlindexenhtml

JP the Policy Board of the Bank of Japan




Ben Bernanke (14th Chair of the Fedrsquos BoG)

PhD from MIT 1979

Chair Princeton Econ Dpt1996 - 2002

Member Fed BoG 2002 - 2005

Chair CEA June 2005 - Jan2006

Chair BoG of Fed Feb 2006 -present




Masaaki Shirakawa (30th Governor Bank of Japan)

BA in Economics 1972 TheUniversity of Tokyo

MA in Economics 1977University of Chicago

Professor July 2006 KyotoUniversity School of Gov-ernment

Governor Bank of Japan Apr9 2008 - present




Bank of Japan

Established 1882 the Bank of Japan Act of 1882

Reorganized 1942 Bank of Japan Act of 1942

1949 Policy Board established one of several amendments afterWorld War IIPB = highest decision-making body

Reorganized 1998 Bank of Japan Act of 1997principles independence and transparency

The BoJ has an explicit price stability goal in its bylaws




Jean-Claude Trichet 2nd President of the ECB

European Monetary CommitteeChair 1992-1993

Banque de France Governor1993 - 2003

ECB President 2003 - present(also Chair of 10 Gover-nors)




ECB Governing Council


six members of the Executive Board plusgovernors of the national central banks of the 16 euro areacountriesthe main decision-making body of the ECB

The ECB GC formulates monetary policy for the euro areaThe ECB Governing Council usually meets twice a month at theEurotower in Frankfurt am Main Germany




ECB Deposit Rate

httpsdwecbeuropaeureportsdonode=100000131

httpenwikipediaorgwikiEurozoneInterest_rates




Interest Rates over Time




Eurosystem

historical noveltysupranational monetary unionEuro launched 1 Jan 1999Physical euros since 1 Jan 2002

European Central Bank (ECB)led by Governing Council

National central banks (NCBs)EU member states that have adopted the Euro




Money Supply

money supply (M) the quantity of money that circulates in aneconomyM = C + Dcurrency help by public plus checkable deposits

monetary base (MB) currency held by public + reserves of banksMB = C + Rinfluences broader measures of the money supply

eg checkable deposits (including debit card accounts)

The monetary authority can roughly control the money supply

US monetary authority is a central banking system FederalReserve System

The Fed can directly regulate the monetary base




Money Demand

Money demand the amount of money individuals and businessesare willing to hold (instead of illiquid assets)

Real money demand (L) the amount of purchasing powerindividuals and businesses are willing to hold in the form ofmoney (instead of illiquid assets)




Influences on the Demand for Money

1 Expected returns rates of returns on non-monetary assets(compared to monetary assets)monetary assets pay little or no interestthe interest rate on non-monetary assets is the opportunity costof holding monetary assets ^R _L

2 Riskthe risk of holding M is largely inflation risk which reduces thepurchasing power of moneybut other assets have this risk too so this risk is not veryimportant in defining the demand for monetary assets

3 LiquidityM is the most liquid asset it is the asset with the lowest cost ofturning it into other assets or commodities

4 Prices and income ^P - ^need for M ^Y - ^need for M




Prices and Income

A higher level of average prices means a greater need for liquidityto buy the same amount of goods and services -gt highernominal demand for money

A higher real national income (GNP) means more goods andservices are being produced and bought in transactionsincreasing the need for liquidity -gt higher real demand for money




Money Demand

Aggregate money demand

real L(RY)nominal P x L(RY)

where

P is the price levelY is real national incomeR is a measure of interest rates on non-monetary assets

Aggregate demand for real monetary assets is influenced by

transactions demand (national income)

opportunity cost (interest rates)




Real Money Demand and the Nominal Interest Rate

L(RY1)

QQ1

R

R1

^ R _ L (move along schedule)Note compare KO Fig 14-1




Real Money Supply and the Nominal Interest Rate

QQ1

R

The real money supply does not respond to R




Money Demand = Money Supply in Equilibrium

L(RY1)

QQ1

R

R1

MP = L in equilibriumNote compare KO Fig 14-3




A Model of the Money Market

The money market markets for trading monetary (very liquid) assetswhich are loosely called ldquomoneyrdquoInterest rates on monetary assets are low compared to interestrates on less liquid assets (such as bonds loans and deposits ofcurrency in the foreign exchange markets)





Money Market Equilibrium no shortages (excess demand) orsurpluses (excess supply) of monetary assets

In nominal terms M = P L(R Y)

In real terms MP = L(R Y)




Interest Rate Effect of Increase in Money Supply (given P)

L(RY1)

QQ1 Q2

R

R1

R2

^ M _ R (given P)Note compare KO Fig 14-3




Increase in Income Shifts Money Demand Schedule

L(RY1)

L(RY2)

QQ2Q1

R

R1

^ income ^ L (at each R)Note compare KO Fig 14-2




Interest Rate Response to a Rise in Real Income

R

QQ1

L(RY1)

L(RY2)R1

R2

Given the price level an increase in Y raises L increasing theequilibrium interest rateNote compare KO 8 Fig 14-5Alan G Isaac Slides for International Finance



Money MarketExchange Rate Linkages

Determines M(eg the Fed)

Domestic Central BankDetermines Mlowast

(eg the ECB)

Foreign Central Bank

Determines R(given M)

Domestic Money MarketDetermines Rlowast

(given Mlowast)

Foreign Money Market

Determines E(given R and Rlowast)

Foreign Exchange Market

Note compare KO 8 Fig 14-7




Simultaneous Equilibrium (Money Market and FX Market)

E1

Q

L(RY1)

Q1

R10 returns

Rlowast+ EeminusEE

E

Note compare KO 8 fig 14-6Alan G Isaac Slides for International Finance



Increase in the Domestic Money Supply

E1

Q

L(RY1)

Q1

R10 returns

Rlowast+ EeminusEE

R2

Q2

E2

E




Increase in the Foreign Money Supply (_ R)

1 ^ M _ R reducing the expected rate of return on eurodeposits

2 As FX mkt participants flee the EUR for the USD the EURdepreciates (Ie the USD appreciates)

How far Until expected rates of return are again equal3 Since the US sets its interest rate independently there is no

change in the US money market




Expansionary Monetary Policy Abroad (_R)

E2

Q

L(RY1)

Q1

R10 returns

Rlowast2 +

EeminusEE

Rlowast1 +

EeminusEE

E1

E

Note compare KO 8 fig 14-9




Impact Effect of ^Ee

E1

Q

L(RY1)

Q1

R10 returns

Rlowast+Ee

1 minusEE

Rlowast+Ee

2 minusEE

E2

E




Short Run vs Long Run

What is the long run Long enough for a change in the moneysupply to produce its full effect on the economy

Long-run neutrality of money In the long run a change in Mproduces a proportional change in all nominal stock variables(eg P E etc)In the long run a change in M does not change any real variables(eg MP EPP etc)

Long run monetary policy influences prices

Short run monetary policy influences interest rates




Inflation in Zaire

1

10

100

1000

10000

100000

1e+006

1e+007

1e+008

1e+009

0190 0191 0192 0193 0194 0195 0196

Mon

ey P

rice

s a

nd E

xcha

nge

Rat

es 0

190

= 1

Exchange RateCPI

Currency

Source httpresearchstlouisfedorgfred2seriesEXUSEUcid=95




Long Run and Short Run

Up to now have have considered short-run analysisIn the long run prices of factors of production and of output havesufficient time to adjust to market conditions

Short Run

prices do not have enough time to adjust to marketconditions

Long Run

Wages adjust to equate the demand for and supply of laborReal output (income) is determined by the economyrsquosproductive capacitymdashfactor supplies (eg the supply oflabor) and technology (Not by the quantity of money)Real interest rates depend on the supply of saved funds anddemand for these funds




Long Run and Short Run (cont)

In the long run the level of the money supply is predicted not toinfluence the amount of output (real) interest rates and the aggregatedemand for real monetary assets L(RY)However the quantity of money supplied is predicted to make level ofaverage prices adjust proportionally in the long runThe equilibrium condition MsP = L(RY) shows that P is predicted toadjust proportionally when Ms changes





In the long run there is a direct relationship between the inflation rateand changes in the money supply

MP = L(RY ) (1)

P = ML(RY ) (2)

∆PP = ∆MM minus∆LL (3)

The inflation rate is predicted to equal the growth rate in money supplyminus the growth rate in money demand




Inflation in Zaire

1

10

100

1000

10000

100000

1e+006

1e+007

1e+008

1e+009

0190 0191 0192 0193 0194 0195 0196

Mon

ey P

rice

s a

nd E

xcha

nge

Rat

es 0

190

= 1

Exchange RateCPI

Currency




Money and Prices in the Long Run

How does a change in the money supply cause prices of output andinputs to change

Excess demand for goods and services a higher quantity ofmoney supplied implies that people have more funds available topay for goods and services

To meet high demand producers hire more workers creating astrong demand for labor services or make existing employeeswork harderWages rise to attract more workers or to compensate workers forovertimePrices of output will eventually rise to compensate for higher costsAlternatively for a fixed amount of output and inputs producerscan charge higher prices and still sell all of their output due to thehigh demand




Money and Prices in the Long Run (cont)

2 Inflationary expectations

If workers expect future prices to rise due to anexpected money supply increase they will want to becompensatedAnd if producers expect the same they are more willingto raise wagesProducers will be able to match higher costs if theyexpect to raise pricesResult expectations about inflation caused by anexpected increase in the money supply causes actualinflation




Fig 14-10 Average Money Growth and Inflation in WesternHemisphere Developing Countries by Year 1987ndash2006

Source IMF World Economic Outlook various issues Regionalaggregates are weighted by shares of dollar GDP in total regionaldollar GDP




Money Growth and Inflation




Short-Run Effects of a Permanent Increase in the USMoney Supply

Combine two previous experiments

^ M (given Ee) drives down R producing a depreciation

^ Ee (given M) At each E the expected return on euro deposits risesbecause of Ee rises producing additional depreciation

Ee changes because the change in M is permanentNote Y remains exogenously fixed




Short-Run Effects of a Permanent Increase in M

ESR

Q

L(RY1)

Q2

R20 returns

Rlowast+Ee

2 minusEE

Rlowast+Ee

1 minusEE

E1

R1

Q1




Long-Run Effects of a Permanent Increase in M

ESR

Q

L(RY1)

Q2

R20 returns

Rlowast+Ee

2 minusEEELR

RLR

QLR




Overshooting

Permanent ^M a proportional ^E in LRBUT the dynamics involve a large iniitial depreciation and then asmaller subsequent appreciation

Permanent _M a proportional _E in LRBUT the dynamics involve a large iniitial appreciation and then asmaller subsequent depreciation




Rudiger Dornbusch (1942ndash2002)

1971 PhD from U of C

1975ndash2002 MITrsquos econ dpt

1976 ldquoExpectations and Ex-change Rate Dynamicsrdquo(JPE)

1999 ldquoThis expansion will runforeverrdquo (re the 1991ndash2001expansion)




Permanent Increase in M Changes Over Time

t t

t

t0 t0

t0 t0

M

P E

R

t





Exchange Rate Overshooting

We say that the exchange rate overshoots when its SR response to achange is greater than its LR response

Our model predicts exchange rate overshooting because M hasan immediate effect on R but not on P (nor expected inflation)

This overshooting prediction helps explain why exchange ratesare so volatile




Fig 14-11 Month-to-Month Variability of the DollarYenExchange Rate and of the USJapan Price Level Ratio1974ndash2007

Source KO Figure 14-11




Preview

Defining money

Policy control of the money supply

Determinants of the demand for monetary assetsInterest rate determination

equilibrium in the money market

Exchange rate determination reduxLinking the money market and FX market

Long run effects of money supply changesprices interest rates and exchange rates




Money







M1





Monetary Authority









Fed Funds




Monetary Base




Monetary Authority








PhD from MIT 1979
















Bank of Japan























ECB Deposit Rate










Eurosystem







Money Supply










Money Demand














Prices and Income






Money Demand



where









L(RY1)

QQ1

R

R1






QQ1

R






L(RY1)

QQ1

R

R1


















L(RY1)

QQ1 Q2

R

R1

R2






L(RY1)

L(RY2)

QQ2Q1

R

R1






R

QQ1

L(RY1)

L(RY2)R1

R2







(eg the ECB)




(given Mlowast)









E1

Q

L(RY1)

Q1

R10 returns

Rlowast+ EeminusEE

E





E1

Q

L(RY1)

Q1

R10 returns

Rlowast+ EeminusEE

R2

Q2

E2

E













E2

Q

L(RY1)

Q1

R10 returns

Rlowast2 +

EeminusEE

Rlowast1 +

EeminusEE

E1

E






E1

Q

L(RY1)

Q1

R10 returns

Rlowast+Ee

1 minusEE

Rlowast+Ee

2 minusEE

E2

E












Inflation in Zaire

1

10

100

1000

10000

100000

1e+006

1e+007

1e+008

1e+009

0190 0191 0192 0193 0194 0195 0196

Mon

ey P

rice

s a

nd E

xcha

nge

Rat

es 0

190

= 1

Exchange RateCPI

Currency







Short Run


Long Run












MP = L(RY ) (1)

P = ML(RY ) (2)






Inflation in Zaire

1

10

100

1000

10000

100000

1e+006

1e+007

1e+008

1e+009

0190 0191 0192 0193 0194 0195 0196

Mon

ey P

rice

s a

nd E

xcha

nge

Rat

es 0

190

= 1

Exchange RateCPI

Currency



































ESR

Q

L(RY1)

Q2

R20 returns

Rlowast+Ee

2 minusEE

Rlowast+Ee

1 minusEE

E1

R1

Q1





ESR

Q

L(RY1)

Q2

R20 returns

Rlowast+Ee

2 minusEEELR

RLR

QLR




Overshooting















t t

t

t0 t0

t0 t0

M

P E

R

t

















Money







M1





Monetary Authority









Fed Funds




Monetary Base




Monetary Authority








PhD from MIT 1979
















Bank of Japan























ECB Deposit Rate










Eurosystem







Money Supply










Money Demand














Prices and Income






Money Demand



where









L(RY1)

QQ1

R

R1






QQ1

R






L(RY1)

QQ1

R

R1


















L(RY1)

QQ1 Q2

R

R1

R2






L(RY1)

L(RY2)

QQ2Q1

R

R1






R

QQ1

L(RY1)

L(RY2)R1

R2







(eg the ECB)




(given Mlowast)









E1

Q

L(RY1)

Q1

R10 returns

Rlowast+ EeminusEE

E





E1

Q

L(RY1)

Q1

R10 returns

Rlowast+ EeminusEE

R2

Q2

E2

E













E2

Q

L(RY1)

Q1

R10 returns

Rlowast2 +

EeminusEE

Rlowast1 +

EeminusEE

E1

E






E1

Q

L(RY1)

Q1

R10 returns

Rlowast+Ee

1 minusEE

Rlowast+Ee

2 minusEE

E2

E












Inflation in Zaire

1

10

100

1000

10000

100000

1e+006

1e+007

1e+008

1e+009

0190 0191 0192 0193 0194 0195 0196

Mon

ey P

rice

s a

nd E

xcha

nge

Rat

es 0

190

= 1

Exchange RateCPI

Currency







Short Run


Long Run












MP = L(RY ) (1)

P = ML(RY ) (2)






Inflation in Zaire

1

10

100

1000

10000

100000

1e+006

1e+007

1e+008

1e+009

0190 0191 0192 0193 0194 0195 0196

Mon

ey P

rice

s a

nd E

xcha

nge

Rat

es 0

190

= 1

Exchange RateCPI

Currency



































ESR

Q

L(RY1)

Q2

R20 returns

Rlowast+Ee

2 minusEE

Rlowast+Ee

1 minusEE

E1

R1

Q1





ESR

Q

L(RY1)

Q2

R20 returns

Rlowast+Ee

2 minusEEELR

RLR

QLR




Overshooting















t t

t

t0 t0

t0 t0

M

P E

R

t

















M1





Monetary Authority









Fed Funds




Monetary Base




Monetary Authority








PhD from MIT 1979
















Bank of Japan























ECB Deposit Rate










Eurosystem







Money Supply










Money Demand














Prices and Income






Money Demand



where









L(RY1)

QQ1

R

R1






QQ1

R






L(RY1)

QQ1

R

R1


















L(RY1)

QQ1 Q2

R

R1

R2






L(RY1)

L(RY2)

QQ2Q1

R

R1






R

QQ1

L(RY1)

L(RY2)R1

R2







(eg the ECB)




(given Mlowast)









E1

Q

L(RY1)

Q1

R10 returns

Rlowast+ EeminusEE

E





E1

Q

L(RY1)

Q1

R10 returns

Rlowast+ EeminusEE

R2

Q2

E2

E













E2

Q

L(RY1)

Q1

R10 returns

Rlowast2 +

EeminusEE

Rlowast1 +

EeminusEE

E1

E






E1

Q

L(RY1)

Q1

R10 returns

Rlowast+Ee

1 minusEE

Rlowast+Ee

2 minusEE

E2

E












Inflation in Zaire

1

10

100

1000

10000

100000

1e+006

1e+007

1e+008

1e+009

0190 0191 0192 0193 0194 0195 0196

Mon

ey P

rice

s a

nd E

xcha

nge

Rat

es 0

190

= 1

Exchange RateCPI

Currency







Short Run


Long Run












MP = L(RY ) (1)

P = ML(RY ) (2)






Inflation in Zaire

1

10

100

1000

10000

100000

1e+006

1e+007

1e+008

1e+009

0190 0191 0192 0193 0194 0195 0196

Mon

ey P

rice

s a

nd E

xcha

nge

Rat

es 0

190

= 1

Exchange RateCPI

Currency



































ESR

Q

L(RY1)

Q2

R20 returns

Rlowast+Ee

2 minusEE

Rlowast+Ee

1 minusEE

E1

R1

Q1





ESR

Q

L(RY1)

Q2

R20 returns

Rlowast+Ee

2 minusEEELR

RLR

QLR




Overshooting















t t

t

t0 t0

t0 t0

M

P E

R

t

















Monetary Authority









Fed Funds




Monetary Base




Monetary Authority








PhD from MIT 1979
















Bank of Japan























ECB Deposit Rate










Eurosystem







Money Supply










Money Demand














Prices and Income






Money Demand



where









L(RY1)

QQ1

R

R1






QQ1

R






L(RY1)

QQ1

R

R1


















L(RY1)

QQ1 Q2

R

R1

R2






L(RY1)

L(RY2)

QQ2Q1

R

R1






R

QQ1

L(RY1)

L(RY2)R1

R2







(eg the ECB)




(given Mlowast)









E1

Q

L(RY1)

Q1

R10 returns

Rlowast+ EeminusEE

E





E1

Q

L(RY1)

Q1

R10 returns

Rlowast+ EeminusEE

R2

Q2

E2

E













E2

Q

L(RY1)

Q1

R10 returns

Rlowast2 +

EeminusEE

Rlowast1 +

EeminusEE

E1

E






E1

Q

L(RY1)

Q1

R10 returns

Rlowast+Ee

1 minusEE

Rlowast+Ee

2 minusEE

E2

E












Inflation in Zaire

1

10

100

1000

10000

100000

1e+006

1e+007

1e+008

1e+009

0190 0191 0192 0193 0194 0195 0196

Mon

ey P

rice

s a

nd E

xcha

nge

Rat

es 0

190

= 1

Exchange RateCPI

Currency







Short Run


Long Run












MP = L(RY ) (1)

P = ML(RY ) (2)






Inflation in Zaire

1

10

100

1000

10000

100000

1e+006

1e+007

1e+008

1e+009

0190 0191 0192 0193 0194 0195 0196

Mon

ey P

rice

s a

nd E

xcha

nge

Rat

es 0

190

= 1

Exchange RateCPI

Currency



































ESR

Q

L(RY1)

Q2

R20 returns

Rlowast+Ee

2 minusEE

Rlowast+Ee

1 minusEE

E1

R1

Q1





ESR

Q

L(RY1)

Q2

R20 returns

Rlowast+Ee

2 minusEEELR

RLR

QLR




Overshooting















t t

t

t0 t0

t0 t0

M

P E

R

t

















Fed Funds




Monetary Base




Monetary Authority








PhD from MIT 1979
















Bank of Japan























ECB Deposit Rate










Eurosystem







Money Supply










Money Demand














Prices and Income






Money Demand



where









L(RY1)

QQ1

R

R1






QQ1

R






L(RY1)

QQ1

R

R1


















L(RY1)

QQ1 Q2

R

R1

R2






L(RY1)

L(RY2)

QQ2Q1

R

R1






R

QQ1

L(RY1)

L(RY2)R1

R2







(eg the ECB)




(given Mlowast)









E1

Q

L(RY1)

Q1

R10 returns

Rlowast+ EeminusEE

E





E1

Q

L(RY1)

Q1

R10 returns

Rlowast+ EeminusEE

R2

Q2

E2

E













E2

Q

L(RY1)

Q1

R10 returns

Rlowast2 +

EeminusEE

Rlowast1 +

EeminusEE

E1

E






E1

Q

L(RY1)

Q1

R10 returns

Rlowast+Ee

1 minusEE

Rlowast+Ee

2 minusEE

E2

E












Inflation in Zaire

1

10

100

1000

10000

100000

1e+006

1e+007

1e+008

1e+009

0190 0191 0192 0193 0194 0195 0196

Mon

ey P

rice

s a

nd E

xcha

nge

Rat

es 0

190

= 1

Exchange RateCPI

Currency







Short Run


Long Run












MP = L(RY ) (1)

P = ML(RY ) (2)






Inflation in Zaire

1

10

100

1000

10000

100000

1e+006

1e+007

1e+008

1e+009

0190 0191 0192 0193 0194 0195 0196

Mon

ey P

rice

s a

nd E

xcha

nge

Rat

es 0

190

= 1

Exchange RateCPI

Currency



































ESR

Q

L(RY1)

Q2

R20 returns

Rlowast+Ee

2 minusEE

Rlowast+Ee

1 minusEE

E1

R1

Q1





ESR

Q

L(RY1)

Q2

R20 returns

Rlowast+Ee

2 minusEEELR

RLR

QLR




Overshooting















t t

t

t0 t0

t0 t0

M

P E

R

t

















Monetary Base




Monetary Authority








PhD from MIT 1979
















Bank of Japan























ECB Deposit Rate










Eurosystem







Money Supply










Money Demand














Prices and Income






Money Demand



where









L(RY1)

QQ1

R

R1






QQ1

R






L(RY1)

QQ1

R

R1


















L(RY1)

QQ1 Q2

R

R1

R2






L(RY1)

L(RY2)

QQ2Q1

R

R1






R

QQ1

L(RY1)

L(RY2)R1

R2







(eg the ECB)




(given Mlowast)









E1

Q

L(RY1)

Q1

R10 returns

Rlowast+ EeminusEE

E





E1

Q

L(RY1)

Q1

R10 returns

Rlowast+ EeminusEE

R2

Q2

E2

E













E2

Q

L(RY1)

Q1

R10 returns

Rlowast2 +

EeminusEE

Rlowast1 +

EeminusEE

E1

E






E1

Q

L(RY1)

Q1

R10 returns

Rlowast+Ee

1 minusEE

Rlowast+Ee

2 minusEE

E2

E












Inflation in Zaire

1

10

100

1000

10000

100000

1e+006

1e+007

1e+008

1e+009

0190 0191 0192 0193 0194 0195 0196

Mon

ey P

rice

s a

nd E

xcha

nge

Rat

es 0

190

= 1

Exchange RateCPI

Currency







Short Run


Long Run












MP = L(RY ) (1)

P = ML(RY ) (2)






Inflation in Zaire

1

10

100

1000

10000

100000

1e+006

1e+007

1e+008

1e+009

0190 0191 0192 0193 0194 0195 0196

Mon

ey P

rice

s a

nd E

xcha

nge

Rat

es 0

190

= 1

Exchange RateCPI

Currency



































ESR

Q

L(RY1)

Q2

R20 returns

Rlowast+Ee

2 minusEE

Rlowast+Ee

1 minusEE

E1

R1

Q1





ESR

Q

L(RY1)

Q2

R20 returns

Rlowast+Ee

2 minusEEELR

RLR

QLR




Overshooting















t t

t

t0 t0

t0 t0

M

P E

R

t

















Monetary Authority








PhD from MIT 1979
















Bank of Japan























ECB Deposit Rate










Eurosystem







Money Supply










Money Demand














Prices and Income






Money Demand



where









L(RY1)

QQ1

R

R1






QQ1

R






L(RY1)

QQ1

R

R1


















L(RY1)

QQ1 Q2

R

R1

R2






L(RY1)

L(RY2)

QQ2Q1

R

R1






R

QQ1

L(RY1)

L(RY2)R1

R2







(eg the ECB)




(given Mlowast)









E1

Q

L(RY1)

Q1

R10 returns

Rlowast+ EeminusEE

E





E1

Q

L(RY1)

Q1

R10 returns

Rlowast+ EeminusEE

R2

Q2

E2

E













E2

Q

L(RY1)

Q1

R10 returns

Rlowast2 +

EeminusEE

Rlowast1 +

EeminusEE

E1

E






E1

Q

L(RY1)

Q1

R10 returns

Rlowast+Ee

1 minusEE

Rlowast+Ee

2 minusEE

E2

E












Inflation in Zaire

1

10

100

1000

10000

100000

1e+006

1e+007

1e+008

1e+009

0190 0191 0192 0193 0194 0195 0196

Mon

ey P

rice

s a

nd E

xcha

nge

Rat

es 0

190

= 1

Exchange RateCPI

Currency







Short Run


Long Run












MP = L(RY ) (1)

P = ML(RY ) (2)






Inflation in Zaire

1

10

100

1000

10000

100000

1e+006

1e+007

1e+008

1e+009

0190 0191 0192 0193 0194 0195 0196

Mon

ey P

rice

s a

nd E

xcha

nge

Rat

es 0

190

= 1

Exchange RateCPI

Currency



































ESR

Q

L(RY1)

Q2

R20 returns

Rlowast+Ee

2 minusEE

Rlowast+Ee

1 minusEE

E1

R1

Q1





ESR

Q

L(RY1)

Q2

R20 returns

Rlowast+Ee

2 minusEEELR

RLR

QLR




Overshooting















t t

t

t0 t0

t0 t0

M

P E

R

t


















PhD from MIT 1979
















Bank of Japan























ECB Deposit Rate










Eurosystem







Money Supply










Money Demand














Prices and Income






Money Demand



where









L(RY1)

QQ1

R

R1






QQ1

R






L(RY1)

QQ1

R

R1


















L(RY1)

QQ1 Q2

R

R1

R2






L(RY1)

L(RY2)

QQ2Q1

R

R1






R

QQ1

L(RY1)

L(RY2)R1

R2







(eg the ECB)




(given Mlowast)









E1

Q

L(RY1)

Q1

R10 returns

Rlowast+ EeminusEE

E





E1

Q

L(RY1)

Q1

R10 returns

Rlowast+ EeminusEE

R2

Q2

E2

E













E2

Q

L(RY1)

Q1

R10 returns

Rlowast2 +

EeminusEE

Rlowast1 +

EeminusEE

E1

E






E1

Q

L(RY1)

Q1

R10 returns

Rlowast+Ee

1 minusEE

Rlowast+Ee

2 minusEE

E2

E












Inflation in Zaire

1

10

100

1000

10000

100000

1e+006

1e+007

1e+008

1e+009

0190 0191 0192 0193 0194 0195 0196

Mon

ey P

rice

s a

nd E

xcha

nge

Rat

es 0

190

= 1

Exchange RateCPI

Currency







Short Run


Long Run












MP = L(RY ) (1)

P = ML(RY ) (2)






Inflation in Zaire

1

10

100

1000

10000

100000

1e+006

1e+007

1e+008

1e+009

0190 0191 0192 0193 0194 0195 0196

Mon

ey P

rice

s a

nd E

xcha

nge

Rat

es 0

190

= 1

Exchange RateCPI

Currency



































ESR

Q

L(RY1)

Q2

R20 returns

Rlowast+Ee

2 minusEE

Rlowast+Ee

1 minusEE

E1

R1

Q1





ESR

Q

L(RY1)

Q2

R20 returns

Rlowast+Ee

2 minusEEELR

RLR

QLR




Overshooting















t t

t

t0 t0

t0 t0

M

P E

R

t

























Bank of Japan























ECB Deposit Rate










Eurosystem







Money Supply










Money Demand














Prices and Income






Money Demand



where









L(RY1)

QQ1

R

R1






QQ1

R






L(RY1)

QQ1

R

R1


















L(RY1)

QQ1 Q2

R

R1

R2






L(RY1)

L(RY2)

QQ2Q1

R

R1






R

QQ1

L(RY1)

L(RY2)R1

R2







(eg the ECB)




(given Mlowast)









E1

Q

L(RY1)

Q1

R10 returns

Rlowast+ EeminusEE

E





E1

Q

L(RY1)

Q1

R10 returns

Rlowast+ EeminusEE

R2

Q2

E2

E













E2

Q

L(RY1)

Q1

R10 returns

Rlowast2 +

EeminusEE

Rlowast1 +

EeminusEE

E1

E






E1

Q

L(RY1)

Q1

R10 returns

Rlowast+Ee

1 minusEE

Rlowast+Ee

2 minusEE

E2

E












Inflation in Zaire

1

10

100

1000

10000

100000

1e+006

1e+007

1e+008

1e+009

0190 0191 0192 0193 0194 0195 0196

Mon

ey P

rice

s a

nd E

xcha

nge

Rat

es 0

190

= 1

Exchange RateCPI

Currency







Short Run


Long Run












MP = L(RY ) (1)

P = ML(RY ) (2)






Inflation in Zaire

1

10

100

1000

10000

100000

1e+006

1e+007

1e+008

1e+009

0190 0191 0192 0193 0194 0195 0196

Mon

ey P

rice

s a

nd E

xcha

nge

Rat

es 0

190

= 1

Exchange RateCPI

Currency



































ESR

Q

L(RY1)

Q2

R20 returns

Rlowast+Ee

2 minusEE

Rlowast+Ee

1 minusEE

E1

R1

Q1





ESR

Q

L(RY1)

Q2

R20 returns

Rlowast+Ee

2 minusEEELR

RLR

QLR




Overshooting















t t

t

t0 t0

t0 t0

M

P E

R

t

















Bank of Japan























ECB Deposit Rate










Eurosystem







Money Supply










Money Demand














Prices and Income






Money Demand



where









L(RY1)

QQ1

R

R1






QQ1

R






L(RY1)

QQ1

R

R1


















L(RY1)

QQ1 Q2

R

R1

R2






L(RY1)

L(RY2)

QQ2Q1

R

R1






R

QQ1

L(RY1)

L(RY2)R1

R2







(eg the ECB)




(given Mlowast)









E1

Q

L(RY1)

Q1

R10 returns

Rlowast+ EeminusEE

E





E1

Q

L(RY1)

Q1

R10 returns

Rlowast+ EeminusEE

R2

Q2

E2

E













E2

Q

L(RY1)

Q1

R10 returns

Rlowast2 +

EeminusEE

Rlowast1 +

EeminusEE

E1

E






E1

Q

L(RY1)

Q1

R10 returns

Rlowast+Ee

1 minusEE

Rlowast+Ee

2 minusEE

E2

E












Inflation in Zaire

1

10

100

1000

10000

100000

1e+006

1e+007

1e+008

1e+009

0190 0191 0192 0193 0194 0195 0196

Mon

ey P

rice

s a

nd E

xcha

nge

Rat

es 0

190

= 1

Exchange RateCPI

Currency







Short Run


Long Run












MP = L(RY ) (1)

P = ML(RY ) (2)






Inflation in Zaire

1

10

100

1000

10000

100000

1e+006

1e+007

1e+008

1e+009

0190 0191 0192 0193 0194 0195 0196

Mon

ey P

rice

s a

nd E

xcha

nge

Rat

es 0

190

= 1

Exchange RateCPI

Currency



































ESR

Q

L(RY1)

Q2

R20 returns

Rlowast+Ee

2 minusEE

Rlowast+Ee

1 minusEE

E1

R1

Q1





ESR

Q

L(RY1)

Q2

R20 returns

Rlowast+Ee

2 minusEEELR

RLR

QLR




Overshooting















t t

t

t0 t0

t0 t0

M

P E

R

t































ECB Deposit Rate










Eurosystem







Money Supply










Money Demand














Prices and Income






Money Demand



where









L(RY1)

QQ1

R

R1






QQ1

R






L(RY1)

QQ1

R

R1


















L(RY1)

QQ1 Q2

R

R1

R2






L(RY1)

L(RY2)

QQ2Q1

R

R1






R

QQ1

L(RY1)

L(RY2)R1

R2







(eg the ECB)




(given Mlowast)









E1

Q

L(RY1)

Q1

R10 returns

Rlowast+ EeminusEE

E





E1

Q

L(RY1)

Q1

R10 returns

Rlowast+ EeminusEE

R2

Q2

E2

E













E2

Q

L(RY1)

Q1

R10 returns

Rlowast2 +

EeminusEE

Rlowast1 +

EeminusEE

E1

E






E1

Q

L(RY1)

Q1

R10 returns

Rlowast+Ee

1 minusEE

Rlowast+Ee

2 minusEE

E2

E












Inflation in Zaire

1

10

100

1000

10000

100000

1e+006

1e+007

1e+008

1e+009

0190 0191 0192 0193 0194 0195 0196

Mon

ey P

rice

s a

nd E

xcha

nge

Rat

es 0

190

= 1

Exchange RateCPI

Currency







Short Run


Long Run












MP = L(RY ) (1)

P = ML(RY ) (2)






Inflation in Zaire

1

10

100

1000

10000

100000

1e+006

1e+007

1e+008

1e+009

0190 0191 0192 0193 0194 0195 0196

Mon

ey P

rice

s a

nd E

xcha

nge

Rat

es 0

190

= 1

Exchange RateCPI

Currency



































ESR

Q

L(RY1)

Q2

R20 returns

Rlowast+Ee

2 minusEE

Rlowast+Ee

1 minusEE

E1

R1

Q1





ESR

Q

L(RY1)

Q2

R20 returns

Rlowast+Ee

2 minusEEELR

RLR

QLR




Overshooting















t t

t

t0 t0

t0 t0

M

P E

R

t
























ECB Deposit Rate










Eurosystem







Money Supply










Money Demand














Prices and Income






Money Demand



where









L(RY1)

QQ1

R

R1






QQ1

R






L(RY1)

QQ1

R

R1


















L(RY1)

QQ1 Q2

R

R1

R2






L(RY1)

L(RY2)

QQ2Q1

R

R1






R

QQ1

L(RY1)

L(RY2)R1

R2







(eg the ECB)




(given Mlowast)









E1

Q

L(RY1)

Q1

R10 returns

Rlowast+ EeminusEE

E





E1

Q

L(RY1)

Q1

R10 returns

Rlowast+ EeminusEE

R2

Q2

E2

E













E2

Q

L(RY1)

Q1

R10 returns

Rlowast2 +

EeminusEE

Rlowast1 +

EeminusEE

E1

E






E1

Q

L(RY1)

Q1

R10 returns

Rlowast+Ee

1 minusEE

Rlowast+Ee

2 minusEE

E2

E












Inflation in Zaire

1

10

100

1000

10000

100000

1e+006

1e+007

1e+008

1e+009

0190 0191 0192 0193 0194 0195 0196

Mon

ey P

rice

s a

nd E

xcha

nge

Rat

es 0

190

= 1

Exchange RateCPI

Currency







Short Run


Long Run












MP = L(RY ) (1)

P = ML(RY ) (2)






Inflation in Zaire

1

10

100

1000

10000

100000

1e+006

1e+007

1e+008

1e+009

0190 0191 0192 0193 0194 0195 0196

Mon

ey P

rice

s a

nd E

xcha

nge

Rat

es 0

190

= 1

Exchange RateCPI

Currency



































ESR

Q

L(RY1)

Q2

R20 returns

Rlowast+Ee

2 minusEE

Rlowast+Ee

1 minusEE

E1

R1

Q1





ESR

Q

L(RY1)

Q2

R20 returns

Rlowast+Ee

2 minusEEELR

RLR

QLR




Overshooting















t t

t

t0 t0

t0 t0

M

P E

R

t

















ECB Deposit Rate










Eurosystem







Money Supply










Money Demand














Prices and Income






Money Demand



where









L(RY1)

QQ1

R

R1






QQ1

R






L(RY1)

QQ1

R

R1


















L(RY1)

QQ1 Q2

R

R1

R2






L(RY1)

L(RY2)

QQ2Q1

R

R1






R

QQ1

L(RY1)

L(RY2)R1

R2







(eg the ECB)




(given Mlowast)









E1

Q

L(RY1)

Q1

R10 returns

Rlowast+ EeminusEE

E





E1

Q

L(RY1)

Q1

R10 returns

Rlowast+ EeminusEE

R2

Q2

E2

E













E2

Q

L(RY1)

Q1

R10 returns

Rlowast2 +

EeminusEE

Rlowast1 +

EeminusEE

E1

E






E1

Q

L(RY1)

Q1

R10 returns

Rlowast+Ee

1 minusEE

Rlowast+Ee

2 minusEE

E2

E












Inflation in Zaire

1

10

100

1000

10000

100000

1e+006

1e+007

1e+008

1e+009

0190 0191 0192 0193 0194 0195 0196

Mon

ey P

rice

s a

nd E

xcha

nge

Rat

es 0

190

= 1

Exchange RateCPI

Currency







Short Run


Long Run












MP = L(RY ) (1)

P = ML(RY ) (2)






Inflation in Zaire

1

10

100

1000

10000

100000

1e+006

1e+007

1e+008

1e+009

0190 0191 0192 0193 0194 0195 0196

Mon

ey P

rice

s a

nd E

xcha

nge

Rat

es 0

190

= 1

Exchange RateCPI

Currency



































ESR

Q

L(RY1)

Q2

R20 returns

Rlowast+Ee

2 minusEE

Rlowast+Ee

1 minusEE

E1

R1

Q1





ESR

Q

L(RY1)

Q2

R20 returns

Rlowast+Ee

2 minusEEELR

RLR

QLR




Overshooting















t t

t

t0 t0

t0 t0

M

P E

R

t





















Eurosystem







Money Supply










Money Demand














Prices and Income






Money Demand



where









L(RY1)

QQ1

R

R1






QQ1

R






L(RY1)

QQ1

R

R1


















L(RY1)

QQ1 Q2

R

R1

R2






L(RY1)

L(RY2)

QQ2Q1

R

R1






R

QQ1

L(RY1)

L(RY2)R1

R2







(eg the ECB)




(given Mlowast)









E1

Q

L(RY1)

Q1

R10 returns

Rlowast+ EeminusEE

E





E1

Q

L(RY1)

Q1

R10 returns

Rlowast+ EeminusEE

R2

Q2

E2

E













E2

Q

L(RY1)

Q1

R10 returns

Rlowast2 +

EeminusEE

Rlowast1 +

EeminusEE

E1

E






E1

Q

L(RY1)

Q1

R10 returns

Rlowast+Ee

1 minusEE

Rlowast+Ee

2 minusEE

E2

E












Inflation in Zaire

1

10

100

1000

10000

100000

1e+006

1e+007

1e+008

1e+009

0190 0191 0192 0193 0194 0195 0196

Mon

ey P

rice

s a

nd E

xcha

nge

Rat

es 0

190

= 1

Exchange RateCPI

Currency







Short Run


Long Run












MP = L(RY ) (1)

P = ML(RY ) (2)






Inflation in Zaire

1

10

100

1000

10000

100000

1e+006

1e+007

1e+008

1e+009

0190 0191 0192 0193 0194 0195 0196

Mon

ey P

rice

s a

nd E

xcha

nge

Rat

es 0

190

= 1

Exchange RateCPI

Currency



































ESR

Q

L(RY1)

Q2

R20 returns

Rlowast+Ee

2 minusEE

Rlowast+Ee

1 minusEE

E1

R1

Q1





ESR

Q

L(RY1)

Q2

R20 returns

Rlowast+Ee

2 minusEEELR

RLR

QLR




Overshooting















t t

t

t0 t0

t0 t0

M

P E

R

t

















Eurosystem







Money Supply










Money Demand














Prices and Income






Money Demand



where









L(RY1)

QQ1

R

R1






QQ1

R






L(RY1)

QQ1

R

R1


















L(RY1)

QQ1 Q2

R

R1

R2






L(RY1)

L(RY2)

QQ2Q1

R

R1






R

QQ1

L(RY1)

L(RY2)R1

R2







(eg the ECB)




(given Mlowast)









E1

Q

L(RY1)

Q1

R10 returns

Rlowast+ EeminusEE

E





E1

Q

L(RY1)

Q1

R10 returns

Rlowast+ EeminusEE

R2

Q2

E2

E













E2

Q

L(RY1)

Q1

R10 returns

Rlowast2 +

EeminusEE

Rlowast1 +

EeminusEE

E1

E






E1

Q

L(RY1)

Q1

R10 returns

Rlowast+Ee

1 minusEE

Rlowast+Ee

2 minusEE

E2

E












Inflation in Zaire

1

10

100

1000

10000

100000

1e+006

1e+007

1e+008

1e+009

0190 0191 0192 0193 0194 0195 0196

Mon

ey P

rice

s a

nd E

xcha

nge

Rat

es 0

190

= 1

Exchange RateCPI

Currency







Short Run


Long Run












MP = L(RY ) (1)

P = ML(RY ) (2)






Inflation in Zaire

1

10

100

1000

10000

100000

1e+006

1e+007

1e+008

1e+009

0190 0191 0192 0193 0194 0195 0196

Mon

ey P

rice

s a

nd E

xcha

nge

Rat

es 0

190

= 1

Exchange RateCPI

Currency



































ESR

Q

L(RY1)

Q2

R20 returns

Rlowast+Ee

2 minusEE

Rlowast+Ee

1 minusEE

E1

R1

Q1





ESR

Q

L(RY1)

Q2

R20 returns

Rlowast+Ee

2 minusEEELR

RLR

QLR




Overshooting















t t

t

t0 t0

t0 t0

M

P E

R

t

















Money Supply










Money Demand














Prices and Income






Money Demand



where









L(RY1)

QQ1

R

R1






QQ1

R






L(RY1)

QQ1

R

R1


















L(RY1)

QQ1 Q2

R

R1

R2






L(RY1)

L(RY2)

QQ2Q1

R

R1






R

QQ1

L(RY1)

L(RY2)R1

R2







(eg the ECB)




(given Mlowast)









E1

Q

L(RY1)

Q1

R10 returns

Rlowast+ EeminusEE

E





E1

Q

L(RY1)

Q1

R10 returns

Rlowast+ EeminusEE

R2

Q2

E2

E













E2

Q

L(RY1)

Q1

R10 returns

Rlowast2 +

EeminusEE

Rlowast1 +

EeminusEE

E1

E






E1

Q

L(RY1)

Q1

R10 returns

Rlowast+Ee

1 minusEE

Rlowast+Ee

2 minusEE

E2

E












Inflation in Zaire

1

10

100

1000

10000

100000

1e+006

1e+007

1e+008

1e+009

0190 0191 0192 0193 0194 0195 0196

Mon

ey P

rice

s a

nd E

xcha

nge

Rat

es 0

190

= 1

Exchange RateCPI

Currency







Short Run


Long Run












MP = L(RY ) (1)

P = ML(RY ) (2)






Inflation in Zaire

1

10

100

1000

10000

100000

1e+006

1e+007

1e+008

1e+009

0190 0191 0192 0193 0194 0195 0196

Mon

ey P

rice

s a

nd E

xcha

nge

Rat

es 0

190

= 1

Exchange RateCPI

Currency



































ESR

Q

L(RY1)

Q2

R20 returns

Rlowast+Ee

2 minusEE

Rlowast+Ee

1 minusEE

E1

R1

Q1





ESR

Q

L(RY1)

Q2

R20 returns

Rlowast+Ee

2 minusEEELR

RLR

QLR




Overshooting















t t

t

t0 t0

t0 t0

M

P E

R

t

















Money Demand














Prices and Income






Money Demand



where









L(RY1)

QQ1

R

R1






QQ1

R






L(RY1)

QQ1

R

R1


















L(RY1)

QQ1 Q2

R

R1

R2






L(RY1)

L(RY2)

QQ2Q1

R

R1






R

QQ1

L(RY1)

L(RY2)R1

R2







(eg the ECB)




(given Mlowast)









E1

Q

L(RY1)

Q1

R10 returns

Rlowast+ EeminusEE

E





E1

Q

L(RY1)

Q1

R10 returns

Rlowast+ EeminusEE

R2

Q2

E2

E













E2

Q

L(RY1)

Q1

R10 returns

Rlowast2 +

EeminusEE

Rlowast1 +

EeminusEE

E1

E






E1

Q

L(RY1)

Q1

R10 returns

Rlowast+Ee

1 minusEE

Rlowast+Ee

2 minusEE

E2

E












Inflation in Zaire

1

10

100

1000

10000

100000

1e+006

1e+007

1e+008

1e+009

0190 0191 0192 0193 0194 0195 0196

Mon

ey P

rice

s a

nd E

xcha

nge

Rat

es 0

190

= 1

Exchange RateCPI

Currency







Short Run


Long Run












MP = L(RY ) (1)

P = ML(RY ) (2)






Inflation in Zaire

1

10

100

1000

10000

100000

1e+006

1e+007

1e+008

1e+009

0190 0191 0192 0193 0194 0195 0196

Mon

ey P

rice

s a

nd E

xcha

nge

Rat

es 0

190

= 1

Exchange RateCPI

Currency



































ESR

Q

L(RY1)

Q2

R20 returns

Rlowast+Ee

2 minusEE

Rlowast+Ee

1 minusEE

E1

R1

Q1





ESR

Q

L(RY1)

Q2

R20 returns

Rlowast+Ee

2 minusEEELR

RLR

QLR




Overshooting















t t

t

t0 t0

t0 t0

M

P E

R

t

























Prices and Income






Money Demand



where









L(RY1)

QQ1

R

R1






QQ1

R






L(RY1)

QQ1

R

R1


















L(RY1)

QQ1 Q2

R

R1

R2






L(RY1)

L(RY2)

QQ2Q1

R

R1






R

QQ1

L(RY1)

L(RY2)R1

R2







(eg the ECB)




(given Mlowast)









E1

Q

L(RY1)

Q1

R10 returns

Rlowast+ EeminusEE

E





E1

Q

L(RY1)

Q1

R10 returns

Rlowast+ EeminusEE

R2

Q2

E2

E













E2

Q

L(RY1)

Q1

R10 returns

Rlowast2 +

EeminusEE

Rlowast1 +

EeminusEE

E1

E






E1

Q

L(RY1)

Q1

R10 returns

Rlowast+Ee

1 minusEE

Rlowast+Ee

2 minusEE

E2

E












Inflation in Zaire

1

10

100

1000

10000

100000

1e+006

1e+007

1e+008

1e+009

0190 0191 0192 0193 0194 0195 0196

Mon

ey P

rice

s a

nd E

xcha

nge

Rat

es 0

190

= 1

Exchange RateCPI

Currency







Short Run


Long Run












MP = L(RY ) (1)

P = ML(RY ) (2)






Inflation in Zaire

1

10

100

1000

10000

100000

1e+006

1e+007

1e+008

1e+009

0190 0191 0192 0193 0194 0195 0196

Mon

ey P

rice

s a

nd E

xcha

nge

Rat

es 0

190

= 1

Exchange RateCPI

Currency



































ESR

Q

L(RY1)

Q2

R20 returns

Rlowast+Ee

2 minusEE

Rlowast+Ee

1 minusEE

E1

R1

Q1





ESR

Q

L(RY1)

Q2

R20 returns

Rlowast+Ee

2 minusEEELR

RLR

QLR




Overshooting















t t

t

t0 t0

t0 t0

M

P E

R

t

















Prices and Income






Money Demand



where









L(RY1)

QQ1

R

R1






QQ1

R






L(RY1)

QQ1

R

R1


















L(RY1)

QQ1 Q2

R

R1

R2






L(RY1)

L(RY2)

QQ2Q1

R

R1






R

QQ1

L(RY1)

L(RY2)R1

R2







(eg the ECB)




(given Mlowast)









E1

Q

L(RY1)

Q1

R10 returns

Rlowast+ EeminusEE

E





E1

Q

L(RY1)

Q1

R10 returns

Rlowast+ EeminusEE

R2

Q2

E2

E













E2

Q

L(RY1)

Q1

R10 returns

Rlowast2 +

EeminusEE

Rlowast1 +

EeminusEE

E1

E






E1

Q

L(RY1)

Q1

R10 returns

Rlowast+Ee

1 minusEE

Rlowast+Ee

2 minusEE

E2

E












Inflation in Zaire

1

10

100

1000

10000

100000

1e+006

1e+007

1e+008

1e+009

0190 0191 0192 0193 0194 0195 0196

Mon

ey P

rice

s a

nd E

xcha

nge

Rat

es 0

190

= 1

Exchange RateCPI

Currency







Short Run


Long Run












MP = L(RY ) (1)

P = ML(RY ) (2)






Inflation in Zaire

1

10

100

1000

10000

100000

1e+006

1e+007

1e+008

1e+009

0190 0191 0192 0193 0194 0195 0196

Mon

ey P

rice

s a

nd E

xcha

nge

Rat

es 0

190

= 1

Exchange RateCPI

Currency



































ESR

Q

L(RY1)

Q2

R20 returns

Rlowast+Ee

2 minusEE

Rlowast+Ee

1 minusEE

E1

R1

Q1





ESR

Q

L(RY1)

Q2

R20 returns

Rlowast+Ee

2 minusEEELR

RLR

QLR




Overshooting















t t

t

t0 t0

t0 t0

M

P E

R

t

















Money Demand



where









L(RY1)

QQ1

R

R1






QQ1

R






L(RY1)

QQ1

R

R1


















L(RY1)

QQ1 Q2

R

R1

R2






L(RY1)

L(RY2)

QQ2Q1

R

R1






R

QQ1

L(RY1)

L(RY2)R1

R2







(eg the ECB)




(given Mlowast)









E1

Q

L(RY1)

Q1

R10 returns

Rlowast+ EeminusEE

E





E1

Q

L(RY1)

Q1

R10 returns

Rlowast+ EeminusEE

R2

Q2

E2

E













E2

Q

L(RY1)

Q1

R10 returns

Rlowast2 +

EeminusEE

Rlowast1 +

EeminusEE

E1

E






E1

Q

L(RY1)

Q1

R10 returns

Rlowast+Ee

1 minusEE

Rlowast+Ee

2 minusEE

E2

E












Inflation in Zaire

1

10

100

1000

10000

100000

1e+006

1e+007

1e+008

1e+009

0190 0191 0192 0193 0194 0195 0196

Mon

ey P

rice

s a

nd E

xcha

nge

Rat

es 0

190

= 1

Exchange RateCPI

Currency







Short Run


Long Run












MP = L(RY ) (1)

P = ML(RY ) (2)






Inflation in Zaire

1

10

100

1000

10000

100000

1e+006

1e+007

1e+008

1e+009

0190 0191 0192 0193 0194 0195 0196

Mon

ey P

rice

s a

nd E

xcha

nge

Rat

es 0

190

= 1

Exchange RateCPI

Currency



































ESR

Q

L(RY1)

Q2

R20 returns

Rlowast+Ee

2 minusEE

Rlowast+Ee

1 minusEE

E1

R1

Q1





ESR

Q

L(RY1)

Q2

R20 returns

Rlowast+Ee

2 minusEEELR

RLR

QLR




Overshooting















t t

t

t0 t0

t0 t0

M

P E

R

t


















L(RY1)

QQ1

R

R1






QQ1

R






L(RY1)

QQ1

R

R1


















L(RY1)

QQ1 Q2

R

R1

R2






L(RY1)

L(RY2)

QQ2Q1

R

R1






R

QQ1

L(RY1)

L(RY2)R1

R2







(eg the ECB)




(given Mlowast)









E1

Q

L(RY1)

Q1

R10 returns

Rlowast+ EeminusEE

E





E1

Q

L(RY1)

Q1

R10 returns

Rlowast+ EeminusEE

R2

Q2

E2

E













E2

Q

L(RY1)

Q1

R10 returns

Rlowast2 +

EeminusEE

Rlowast1 +

EeminusEE

E1

E






E1

Q

L(RY1)

Q1

R10 returns

Rlowast+Ee

1 minusEE

Rlowast+Ee

2 minusEE

E2

E












Inflation in Zaire

1

10

100

1000

10000

100000

1e+006

1e+007

1e+008

1e+009

0190 0191 0192 0193 0194 0195 0196

Mon

ey P

rice

s a

nd E

xcha

nge

Rat

es 0

190

= 1

Exchange RateCPI

Currency







Short Run


Long Run












MP = L(RY ) (1)

P = ML(RY ) (2)






Inflation in Zaire

1

10

100

1000

10000

100000

1e+006

1e+007

1e+008

1e+009

0190 0191 0192 0193 0194 0195 0196

Mon

ey P

rice

s a

nd E

xcha

nge

Rat

es 0

190

= 1

Exchange RateCPI

Currency



































ESR

Q

L(RY1)

Q2

R20 returns

Rlowast+Ee

2 minusEE

Rlowast+Ee

1 minusEE

E1

R1

Q1





ESR

Q

L(RY1)

Q2

R20 returns

Rlowast+Ee

2 minusEEELR

RLR

QLR




Overshooting















t t

t

t0 t0

t0 t0

M

P E

R

t


















QQ1

R






L(RY1)

QQ1

R

R1


















L(RY1)

QQ1 Q2

R

R1

R2






L(RY1)

L(RY2)

QQ2Q1

R

R1






R

QQ1

L(RY1)

L(RY2)R1

R2







(eg the ECB)




(given Mlowast)









E1

Q

L(RY1)

Q1

R10 returns

Rlowast+ EeminusEE

E





E1

Q

L(RY1)

Q1

R10 returns

Rlowast+ EeminusEE

R2

Q2

E2

E













E2

Q

L(RY1)

Q1

R10 returns

Rlowast2 +

EeminusEE

Rlowast1 +

EeminusEE

E1

E






E1

Q

L(RY1)

Q1

R10 returns

Rlowast+Ee

1 minusEE

Rlowast+Ee

2 minusEE

E2

E












Inflation in Zaire

1

10

100

1000

10000

100000

1e+006

1e+007

1e+008

1e+009

0190 0191 0192 0193 0194 0195 0196

Mon

ey P

rice

s a

nd E

xcha

nge

Rat

es 0

190

= 1

Exchange RateCPI

Currency







Short Run


Long Run












MP = L(RY ) (1)

P = ML(RY ) (2)






Inflation in Zaire

1

10

100

1000

10000

100000

1e+006

1e+007

1e+008

1e+009

0190 0191 0192 0193 0194 0195 0196

Mon

ey P

rice

s a

nd E

xcha

nge

Rat

es 0

190

= 1

Exchange RateCPI

Currency



































ESR

Q

L(RY1)

Q2

R20 returns

Rlowast+Ee

2 minusEE

Rlowast+Ee

1 minusEE

E1

R1

Q1





ESR

Q

L(RY1)

Q2

R20 returns

Rlowast+Ee

2 minusEEELR

RLR

QLR




Overshooting















t t

t

t0 t0

t0 t0

M

P E

R

t


















L(RY1)

QQ1

R

R1


















L(RY1)

QQ1 Q2

R

R1

R2






L(RY1)

L(RY2)

QQ2Q1

R

R1






R

QQ1

L(RY1)

L(RY2)R1

R2







(eg the ECB)




(given Mlowast)









E1

Q

L(RY1)

Q1

R10 returns

Rlowast+ EeminusEE

E





E1

Q

L(RY1)

Q1

R10 returns

Rlowast+ EeminusEE

R2

Q2

E2

E













E2

Q

L(RY1)

Q1

R10 returns

Rlowast2 +

EeminusEE

Rlowast1 +

EeminusEE

E1

E






E1

Q

L(RY1)

Q1

R10 returns

Rlowast+Ee

1 minusEE

Rlowast+Ee

2 minusEE

E2

E












Inflation in Zaire

1

10

100

1000

10000

100000

1e+006

1e+007

1e+008

1e+009

0190 0191 0192 0193 0194 0195 0196

Mon

ey P

rice

s a

nd E

xcha

nge

Rat

es 0

190

= 1

Exchange RateCPI

Currency







Short Run


Long Run












MP = L(RY ) (1)

P = ML(RY ) (2)






Inflation in Zaire

1

10

100

1000

10000

100000

1e+006

1e+007

1e+008

1e+009

0190 0191 0192 0193 0194 0195 0196

Mon

ey P

rice

s a

nd E

xcha

nge

Rat

es 0

190

= 1

Exchange RateCPI

Currency



































ESR

Q

L(RY1)

Q2

R20 returns

Rlowast+Ee

2 minusEE

Rlowast+Ee

1 minusEE

E1

R1

Q1





ESR

Q

L(RY1)

Q2

R20 returns

Rlowast+Ee

2 minusEEELR

RLR

QLR




Overshooting















t t

t

t0 t0

t0 t0

M

P E

R

t






























L(RY1)

QQ1 Q2

R

R1

R2






L(RY1)

L(RY2)

QQ2Q1

R

R1






R

QQ1

L(RY1)

L(RY2)R1

R2







(eg the ECB)




(given Mlowast)









E1

Q

L(RY1)

Q1

R10 returns

Rlowast+ EeminusEE

E





E1

Q

L(RY1)

Q1

R10 returns

Rlowast+ EeminusEE

R2

Q2

E2

E













E2

Q

L(RY1)

Q1

R10 returns

Rlowast2 +

EeminusEE

Rlowast1 +

EeminusEE

E1

E






E1

Q

L(RY1)

Q1

R10 returns

Rlowast+Ee

1 minusEE

Rlowast+Ee

2 minusEE

E2

E












Inflation in Zaire

1

10

100

1000

10000

100000

1e+006

1e+007

1e+008

1e+009

0190 0191 0192 0193 0194 0195 0196

Mon

ey P

rice

s a

nd E

xcha

nge

Rat

es 0

190

= 1

Exchange RateCPI

Currency







Short Run


Long Run












MP = L(RY ) (1)

P = ML(RY ) (2)






Inflation in Zaire

1

10

100

1000

10000

100000

1e+006

1e+007

1e+008

1e+009

0190 0191 0192 0193 0194 0195 0196

Mon

ey P

rice

s a

nd E

xcha

nge

Rat

es 0

190

= 1

Exchange RateCPI

Currency



































ESR

Q

L(RY1)

Q2

R20 returns

Rlowast+Ee

2 minusEE

Rlowast+Ee

1 minusEE

E1

R1

Q1





ESR

Q

L(RY1)

Q2

R20 returns

Rlowast+Ee

2 minusEEELR

RLR

QLR




Overshooting















t t

t

t0 t0

t0 t0

M

P E

R

t

























L(RY1)

QQ1 Q2

R

R1

R2






L(RY1)

L(RY2)

QQ2Q1

R

R1






R

QQ1

L(RY1)

L(RY2)R1

R2







(eg the ECB)




(given Mlowast)









E1

Q

L(RY1)

Q1

R10 returns

Rlowast+ EeminusEE

E





E1

Q

L(RY1)

Q1

R10 returns

Rlowast+ EeminusEE

R2

Q2

E2

E













E2

Q

L(RY1)

Q1

R10 returns

Rlowast2 +

EeminusEE

Rlowast1 +

EeminusEE

E1

E






E1

Q

L(RY1)

Q1

R10 returns

Rlowast+Ee

1 minusEE

Rlowast+Ee

2 minusEE

E2

E












Inflation in Zaire

1

10

100

1000

10000

100000

1e+006

1e+007

1e+008

1e+009

0190 0191 0192 0193 0194 0195 0196

Mon

ey P

rice

s a

nd E

xcha

nge

Rat

es 0

190

= 1

Exchange RateCPI

Currency







Short Run


Long Run












MP = L(RY ) (1)

P = ML(RY ) (2)






Inflation in Zaire

1

10

100

1000

10000

100000

1e+006

1e+007

1e+008

1e+009

0190 0191 0192 0193 0194 0195 0196

Mon

ey P

rice

s a

nd E

xcha

nge

Rat

es 0

190

= 1

Exchange RateCPI

Currency



































ESR

Q

L(RY1)

Q2

R20 returns

Rlowast+Ee

2 minusEE

Rlowast+Ee

1 minusEE

E1

R1

Q1





ESR

Q

L(RY1)

Q2

R20 returns

Rlowast+Ee

2 minusEEELR

RLR

QLR




Overshooting















t t

t

t0 t0

t0 t0

M

P E

R

t


















L(RY1)

QQ1 Q2

R

R1

R2






L(RY1)

L(RY2)

QQ2Q1

R

R1






R

QQ1

L(RY1)

L(RY2)R1

R2







(eg the ECB)




(given Mlowast)









E1

Q

L(RY1)

Q1

R10 returns

Rlowast+ EeminusEE

E





E1

Q

L(RY1)

Q1

R10 returns

Rlowast+ EeminusEE

R2

Q2

E2

E













E2

Q

L(RY1)

Q1

R10 returns

Rlowast2 +

EeminusEE

Rlowast1 +

EeminusEE

E1

E






E1

Q

L(RY1)

Q1

R10 returns

Rlowast+Ee

1 minusEE

Rlowast+Ee

2 minusEE

E2

E












Inflation in Zaire

1

10

100

1000

10000

100000

1e+006

1e+007

1e+008

1e+009

0190 0191 0192 0193 0194 0195 0196

Mon

ey P

rice

s a

nd E

xcha

nge

Rat

es 0

190

= 1

Exchange RateCPI

Currency







Short Run


Long Run












MP = L(RY ) (1)

P = ML(RY ) (2)






Inflation in Zaire

1

10

100

1000

10000

100000

1e+006

1e+007

1e+008

1e+009

0190 0191 0192 0193 0194 0195 0196

Mon

ey P

rice

s a

nd E

xcha

nge

Rat

es 0

190

= 1

Exchange RateCPI

Currency



































ESR

Q

L(RY1)

Q2

R20 returns

Rlowast+Ee

2 minusEE

Rlowast+Ee

1 minusEE

E1

R1

Q1





ESR

Q

L(RY1)

Q2

R20 returns

Rlowast+Ee

2 minusEEELR

RLR

QLR




Overshooting















t t

t

t0 t0

t0 t0

M

P E

R

t


















L(RY1)

L(RY2)

QQ2Q1

R

R1






R

QQ1

L(RY1)

L(RY2)R1

R2







(eg the ECB)




(given Mlowast)









E1

Q

L(RY1)

Q1

R10 returns

Rlowast+ EeminusEE

E





E1

Q

L(RY1)

Q1

R10 returns

Rlowast+ EeminusEE

R2

Q2

E2

E













E2

Q

L(RY1)

Q1

R10 returns

Rlowast2 +

EeminusEE

Rlowast1 +

EeminusEE

E1

E






E1

Q

L(RY1)

Q1

R10 returns

Rlowast+Ee

1 minusEE

Rlowast+Ee

2 minusEE

E2

E












Inflation in Zaire

1

10

100

1000

10000

100000

1e+006

1e+007

1e+008

1e+009

0190 0191 0192 0193 0194 0195 0196

Mon

ey P

rice

s a

nd E

xcha

nge

Rat

es 0

190

= 1

Exchange RateCPI

Currency







Short Run


Long Run












MP = L(RY ) (1)

P = ML(RY ) (2)






Inflation in Zaire

1

10

100

1000

10000

100000

1e+006

1e+007

1e+008

1e+009

0190 0191 0192 0193 0194 0195 0196

Mon

ey P

rice

s a

nd E

xcha

nge

Rat

es 0

190

= 1

Exchange RateCPI

Currency



































ESR

Q

L(RY1)

Q2

R20 returns

Rlowast+Ee

2 minusEE

Rlowast+Ee

1 minusEE

E1

R1

Q1





ESR

Q

L(RY1)

Q2

R20 returns

Rlowast+Ee

2 minusEEELR

RLR

QLR




Overshooting















t t

t

t0 t0

t0 t0

M

P E

R

t


















R

QQ1

L(RY1)

L(RY2)R1

R2







(eg the ECB)




(given Mlowast)









E1

Q

L(RY1)

Q1

R10 returns

Rlowast+ EeminusEE

E





E1

Q

L(RY1)

Q1

R10 returns

Rlowast+ EeminusEE

R2

Q2

E2

E













E2

Q

L(RY1)

Q1

R10 returns

Rlowast2 +

EeminusEE

Rlowast1 +

EeminusEE

E1

E






E1

Q

L(RY1)

Q1

R10 returns

Rlowast+Ee

1 minusEE

Rlowast+Ee

2 minusEE

E2

E












Inflation in Zaire

1

10

100

1000

10000

100000

1e+006

1e+007

1e+008

1e+009

0190 0191 0192 0193 0194 0195 0196

Mon

ey P

rice

s a

nd E

xcha

nge

Rat

es 0

190

= 1

Exchange RateCPI

Currency







Short Run


Long Run












MP = L(RY ) (1)

P = ML(RY ) (2)






Inflation in Zaire

1

10

100

1000

10000

100000

1e+006

1e+007

1e+008

1e+009

0190 0191 0192 0193 0194 0195 0196

Mon

ey P

rice

s a

nd E

xcha

nge

Rat

es 0

190

= 1

Exchange RateCPI

Currency



































ESR

Q

L(RY1)

Q2

R20 returns

Rlowast+Ee

2 minusEE

Rlowast+Ee

1 minusEE

E1

R1

Q1





ESR

Q

L(RY1)

Q2

R20 returns

Rlowast+Ee

2 minusEEELR

RLR

QLR




Overshooting















t t

t

t0 t0

t0 t0

M

P E

R

t




















(eg the ECB)




(given Mlowast)









E1

Q

L(RY1)

Q1

R10 returns

Rlowast+ EeminusEE

E





E1

Q

L(RY1)

Q1

R10 returns

Rlowast+ EeminusEE

R2

Q2

E2

E













E2

Q

L(RY1)

Q1

R10 returns

Rlowast2 +

EeminusEE

Rlowast1 +

EeminusEE

E1

E






E1

Q

L(RY1)

Q1

R10 returns

Rlowast+Ee

1 minusEE

Rlowast+Ee

2 minusEE

E2

E












Inflation in Zaire

1

10

100

1000

10000

100000

1e+006

1e+007

1e+008

1e+009

0190 0191 0192 0193 0194 0195 0196

Mon

ey P

rice

s a

nd E

xcha

nge

Rat

es 0

190

= 1

Exchange RateCPI

Currency







Short Run


Long Run












MP = L(RY ) (1)

P = ML(RY ) (2)






Inflation in Zaire

1

10

100

1000

10000

100000

1e+006

1e+007

1e+008

1e+009

0190 0191 0192 0193 0194 0195 0196

Mon

ey P

rice

s a

nd E

xcha

nge

Rat

es 0

190

= 1

Exchange RateCPI

Currency



































ESR

Q

L(RY1)

Q2

R20 returns

Rlowast+Ee

2 minusEE

Rlowast+Ee

1 minusEE

E1

R1

Q1





ESR

Q

L(RY1)

Q2

R20 returns

Rlowast+Ee

2 minusEEELR

RLR

QLR




Overshooting















t t

t

t0 t0

t0 t0

M

P E

R

t


















E1

Q

L(RY1)

Q1

R10 returns

Rlowast+ EeminusEE

E





E1

Q

L(RY1)

Q1

R10 returns

Rlowast+ EeminusEE

R2

Q2

E2

E













E2

Q

L(RY1)

Q1

R10 returns

Rlowast2 +

EeminusEE

Rlowast1 +

EeminusEE

E1

E






E1

Q

L(RY1)

Q1

R10 returns

Rlowast+Ee

1 minusEE

Rlowast+Ee

2 minusEE

E2

E












Inflation in Zaire

1

10

100

1000

10000

100000

1e+006

1e+007

1e+008

1e+009

0190 0191 0192 0193 0194 0195 0196

Mon

ey P

rice

s a

nd E

xcha

nge

Rat

es 0

190

= 1

Exchange RateCPI

Currency







Short Run


Long Run












MP = L(RY ) (1)

P = ML(RY ) (2)






Inflation in Zaire

1

10

100

1000

10000

100000

1e+006

1e+007

1e+008

1e+009

0190 0191 0192 0193 0194 0195 0196

Mon

ey P

rice

s a

nd E

xcha

nge

Rat

es 0

190

= 1

Exchange RateCPI

Currency



































ESR

Q

L(RY1)

Q2

R20 returns

Rlowast+Ee

2 minusEE

Rlowast+Ee

1 minusEE

E1

R1

Q1





ESR

Q

L(RY1)

Q2

R20 returns

Rlowast+Ee

2 minusEEELR

RLR

QLR




Overshooting















t t

t

t0 t0

t0 t0

M

P E

R

t


















E1

Q

L(RY1)

Q1

R10 returns

Rlowast+ EeminusEE

R2

Q2

E2

E













E2

Q

L(RY1)

Q1

R10 returns

Rlowast2 +

EeminusEE

Rlowast1 +

EeminusEE

E1

E






E1

Q

L(RY1)

Q1

R10 returns

Rlowast+Ee

1 minusEE

Rlowast+Ee

2 minusEE

E2

E












Inflation in Zaire

1

10

100

1000

10000

100000

1e+006

1e+007

1e+008

1e+009

0190 0191 0192 0193 0194 0195 0196

Mon

ey P

rice

s a

nd E

xcha

nge

Rat

es 0

190

= 1

Exchange RateCPI

Currency







Short Run


Long Run












MP = L(RY ) (1)

P = ML(RY ) (2)






Inflation in Zaire

1

10

100

1000

10000

100000

1e+006

1e+007

1e+008

1e+009

0190 0191 0192 0193 0194 0195 0196

Mon

ey P

rice

s a

nd E

xcha

nge

Rat

es 0

190

= 1

Exchange RateCPI

Currency



































ESR

Q

L(RY1)

Q2

R20 returns

Rlowast+Ee

2 minusEE

Rlowast+Ee

1 minusEE

E1

R1

Q1





ESR

Q

L(RY1)

Q2

R20 returns

Rlowast+Ee

2 minusEEELR

RLR

QLR




Overshooting















t t

t

t0 t0

t0 t0

M

P E

R

t


























E2

Q

L(RY1)

Q1

R10 returns

Rlowast2 +

EeminusEE

Rlowast1 +

EeminusEE

E1

E






E1

Q

L(RY1)

Q1

R10 returns

Rlowast+Ee

1 minusEE

Rlowast+Ee

2 minusEE

E2

E












Inflation in Zaire

1

10

100

1000

10000

100000

1e+006

1e+007

1e+008

1e+009

0190 0191 0192 0193 0194 0195 0196

Mon

ey P

rice

s a

nd E

xcha

nge

Rat

es 0

190

= 1

Exchange RateCPI

Currency







Short Run


Long Run












MP = L(RY ) (1)

P = ML(RY ) (2)






Inflation in Zaire

1

10

100

1000

10000

100000

1e+006

1e+007

1e+008

1e+009

0190 0191 0192 0193 0194 0195 0196

Mon

ey P

rice

s a

nd E

xcha

nge

Rat

es 0

190

= 1

Exchange RateCPI

Currency



































ESR

Q

L(RY1)

Q2

R20 returns

Rlowast+Ee

2 minusEE

Rlowast+Ee

1 minusEE

E1

R1

Q1





ESR

Q

L(RY1)

Q2

R20 returns

Rlowast+Ee

2 minusEEELR

RLR

QLR




Overshooting















t t

t

t0 t0

t0 t0

M

P E

R

t


















E2

Q

L(RY1)

Q1

R10 returns

Rlowast2 +

EeminusEE

Rlowast1 +

EeminusEE

E1

E






E1

Q

L(RY1)

Q1

R10 returns

Rlowast+Ee

1 minusEE

Rlowast+Ee

2 minusEE

E2

E












Inflation in Zaire

1

10

100

1000

10000

100000

1e+006

1e+007

1e+008

1e+009

0190 0191 0192 0193 0194 0195 0196

Mon

ey P

rice

s a

nd E

xcha

nge

Rat

es 0

190

= 1

Exchange RateCPI

Currency







Short Run


Long Run












MP = L(RY ) (1)

P = ML(RY ) (2)






Inflation in Zaire

1

10

100

1000

10000

100000

1e+006

1e+007

1e+008

1e+009

0190 0191 0192 0193 0194 0195 0196

Mon

ey P

rice

s a

nd E

xcha

nge

Rat

es 0

190

= 1

Exchange RateCPI

Currency



































ESR

Q

L(RY1)

Q2

R20 returns

Rlowast+Ee

2 minusEE

Rlowast+Ee

1 minusEE

E1

R1

Q1





ESR

Q

L(RY1)

Q2

R20 returns

Rlowast+Ee

2 minusEEELR

RLR

QLR




Overshooting















t t

t

t0 t0

t0 t0

M

P E

R

t


















E1

Q

L(RY1)

Q1

R10 returns

Rlowast+Ee

1 minusEE

Rlowast+Ee

2 minusEE

E2

E












Inflation in Zaire

1

10

100

1000

10000

100000

1e+006

1e+007

1e+008

1e+009

0190 0191 0192 0193 0194 0195 0196

Mon

ey P

rice

s a

nd E

xcha

nge

Rat

es 0

190

= 1

Exchange RateCPI

Currency







Short Run


Long Run












MP = L(RY ) (1)

P = ML(RY ) (2)






Inflation in Zaire

1

10

100

1000

10000

100000

1e+006

1e+007

1e+008

1e+009

0190 0191 0192 0193 0194 0195 0196

Mon

ey P

rice

s a

nd E

xcha

nge

Rat

es 0

190

= 1

Exchange RateCPI

Currency



































ESR

Q

L(RY1)

Q2

R20 returns

Rlowast+Ee

2 minusEE

Rlowast+Ee

1 minusEE

E1

R1

Q1





ESR

Q

L(RY1)

Q2

R20 returns

Rlowast+Ee

2 minusEEELR

RLR

QLR




Overshooting















t t

t

t0 t0

t0 t0

M

P E

R

t

























Inflation in Zaire

1

10

100

1000

10000

100000

1e+006

1e+007

1e+008

1e+009

0190 0191 0192 0193 0194 0195 0196

Mon

ey P

rice

s a

nd E

xcha

nge

Rat

es 0

190

= 1

Exchange RateCPI

Currency







Short Run


Long Run












MP = L(RY ) (1)

P = ML(RY ) (2)






Inflation in Zaire

1

10

100

1000

10000

100000

1e+006

1e+007

1e+008

1e+009

0190 0191 0192 0193 0194 0195 0196

Mon

ey P

rice

s a

nd E

xcha

nge

Rat

es 0

190

= 1

Exchange RateCPI

Currency



































ESR

Q

L(RY1)

Q2

R20 returns

Rlowast+Ee

2 minusEE

Rlowast+Ee

1 minusEE

E1

R1

Q1





ESR

Q

L(RY1)

Q2

R20 returns

Rlowast+Ee

2 minusEEELR

RLR

QLR




Overshooting















t t

t

t0 t0

t0 t0

M

P E

R

t

















Inflation in Zaire

1

10

100

1000

10000

100000

1e+006

1e+007

1e+008

1e+009

0190 0191 0192 0193 0194 0195 0196

Mon

ey P

rice

s a

nd E

xcha

nge

Rat

es 0

190

= 1

Exchange RateCPI

Currency







Short Run


Long Run












MP = L(RY ) (1)

P = ML(RY ) (2)






Inflation in Zaire

1

10

100

1000

10000

100000

1e+006

1e+007

1e+008

1e+009

0190 0191 0192 0193 0194 0195 0196

Mon

ey P

rice

s a

nd E

xcha

nge

Rat

es 0

190

= 1

Exchange RateCPI

Currency



































ESR

Q

L(RY1)

Q2

R20 returns

Rlowast+Ee

2 minusEE

Rlowast+Ee

1 minusEE

E1

R1

Q1





ESR

Q

L(RY1)

Q2

R20 returns

Rlowast+Ee

2 minusEEELR

RLR

QLR




Overshooting















t t

t

t0 t0

t0 t0

M

P E

R

t



















Short Run


Long Run












MP = L(RY ) (1)

P = ML(RY ) (2)






Inflation in Zaire

1

10

100

1000

10000

100000

1e+006

1e+007

1e+008

1e+009

0190 0191 0192 0193 0194 0195 0196

Mon

ey P

rice

s a

nd E

xcha

nge

Rat

es 0

190

= 1

Exchange RateCPI

Currency



































ESR

Q

L(RY1)

Q2

R20 returns

Rlowast+Ee

2 minusEE

Rlowast+Ee

1 minusEE

E1

R1

Q1





ESR

Q

L(RY1)

Q2

R20 returns

Rlowast+Ee

2 minusEEELR

RLR

QLR




Overshooting















t t

t

t0 t0

t0 t0

M

P E

R

t
























MP = L(RY ) (1)

P = ML(RY ) (2)






Inflation in Zaire

1

10

100

1000

10000

100000

1e+006

1e+007

1e+008

1e+009

0190 0191 0192 0193 0194 0195 0196

Mon

ey P

rice

s a

nd E

xcha

nge

Rat

es 0

190

= 1

Exchange RateCPI

Currency



































ESR

Q

L(RY1)

Q2

R20 returns

Rlowast+Ee

2 minusEE

Rlowast+Ee

1 minusEE

E1

R1

Q1





ESR

Q

L(RY1)

Q2

R20 returns

Rlowast+Ee

2 minusEEELR

RLR

QLR




Overshooting















t t

t

t0 t0

t0 t0

M

P E

R

t



















MP = L(RY ) (1)

P = ML(RY ) (2)






Inflation in Zaire

1

10

100

1000

10000

100000

1e+006

1e+007

1e+008

1e+009

0190 0191 0192 0193 0194 0195 0196

Mon

ey P

rice

s a

nd E

xcha

nge

Rat

es 0

190

= 1

Exchange RateCPI

Currency



































ESR

Q

L(RY1)

Q2

R20 returns

Rlowast+Ee

2 minusEE

Rlowast+Ee

1 minusEE

E1

R1

Q1





ESR

Q

L(RY1)

Q2

R20 returns

Rlowast+Ee

2 minusEEELR

RLR

QLR




Overshooting















t t

t

t0 t0

t0 t0

M

P E

R

t

















Inflation in Zaire

1

10

100

1000

10000

100000

1e+006

1e+007

1e+008

1e+009

0190 0191 0192 0193 0194 0195 0196

Mon

ey P

rice

s a

nd E

xcha

nge

Rat

es 0

190

= 1

Exchange RateCPI

Currency



































ESR

Q

L(RY1)

Q2

R20 returns

Rlowast+Ee

2 minusEE

Rlowast+Ee

1 minusEE

E1

R1

Q1





ESR

Q

L(RY1)

Q2

R20 returns

Rlowast+Ee

2 minusEEELR

RLR

QLR




Overshooting















t t

t

t0 t0

t0 t0

M

P E

R

t
















































ESR

Q

L(RY1)

Q2

R20 returns

Rlowast+Ee

2 minusEE

Rlowast+Ee

1 minusEE

E1

R1

Q1





ESR

Q

L(RY1)

Q2

R20 returns

Rlowast+Ee

2 minusEEELR

RLR

QLR




Overshooting















t t

t

t0 t0

t0 t0

M

P E

R

t









































ESR

Q

L(RY1)

Q2

R20 returns

Rlowast+Ee

2 minusEE

Rlowast+Ee

1 minusEE

E1

R1

Q1





ESR

Q

L(RY1)

Q2

R20 returns

Rlowast+Ee

2 minusEEELR

RLR

QLR




Overshooting















t t

t

t0 t0

t0 t0

M

P E

R

t



































ESR

Q

L(RY1)

Q2

R20 returns

Rlowast+Ee

2 minusEE

Rlowast+Ee

1 minusEE

E1

R1

Q1





ESR

Q

L(RY1)

Q2

R20 returns

Rlowast+Ee

2 minusEEELR

RLR

QLR




Overshooting















t t

t

t0 t0

t0 t0

M

P E

R

t






























ESR

Q

L(RY1)

Q2

R20 returns

Rlowast+Ee

2 minusEE

Rlowast+Ee

1 minusEE

E1

R1

Q1





ESR

Q

L(RY1)

Q2

R20 returns

Rlowast+Ee

2 minusEEELR

RLR

QLR




Overshooting















t t

t

t0 t0

t0 t0

M

P E

R

t


























ESR

Q

L(RY1)

Q2

R20 returns

Rlowast+Ee

2 minusEE

Rlowast+Ee

1 minusEE

E1

R1

Q1





ESR

Q

L(RY1)

Q2

R20 returns

Rlowast+Ee

2 minusEEELR

RLR

QLR




Overshooting















t t

t

t0 t0

t0 t0

M

P E

R

t


















ESR

Q

L(RY1)

Q2

R20 returns

Rlowast+Ee

2 minusEE

Rlowast+Ee

1 minusEE

E1

R1

Q1





ESR

Q

L(RY1)

Q2

R20 returns

Rlowast+Ee

2 minusEEELR

RLR

QLR




Overshooting















t t

t

t0 t0

t0 t0

M

P E

R

t


















ESR

Q

L(RY1)

Q2

R20 returns

Rlowast+Ee

2 minusEEELR

RLR

QLR




Overshooting















t t

t

t0 t0

t0 t0

M

P E

R

t

















Overshooting















t t

t

t0 t0

t0 t0

M

P E

R

t


























t t

t

t0 t0

t0 t0

M

P E

R

t


















t t

t

t0 t0

t0 t0

M

P E

R

t
































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