The Sticky-Price Monetary Model: Exchange Rate Overshooting and Exchange Rate Undershooting

The SPMA model, in common with the MF model, consists of a small open economy, which produces domestically a good which is in the short run an imperfect substitute for a foreign-produced good, faces a given price of foreign output, and a given foreign interest rate. In contrast to the MF model, however, output is assumed to be at the full employment level in the SPMA model. The key equations of the model are discussed in the following section.