The Sticky-Price Monetary Model

In this chapter we consider a number of sticky-price variants of the monetary model. Our discussion starts, in Section 5.1, with the classic Mundell–Fleming model in which prices are rigidly fixed and therefore this model may be viewed as the polar opposite to the flex-price monetary model. In Section 5.2 we go on to discuss the Dornbusch (1976) extension of the Mundell–Fleming model, which we label the sticky-price monetary approach (SPMA). This latter model offers an explanation for excess exchange rate volatility in terms of the assymetrical adjustment of goods and asset markets. In Section 5.3 we consider a stochastic version of the Mundell–Fleming–Dornbusch model. Much as in the previous chapter, the variants of the monetary model mentioned here are all ad hoc, relying primarily on money market equilibrium conditions rather than on the optimising behaviour of agents. In Section 5.4 we therefore consider the sticky-price analogue to the Lucas model introduced in the previous chapter.