Dornbusch Views Essay
His main focusing area of study was macro economics and international economics - Dornbusch Views Essay introduction. His examination on exchange rate issues and his view on sticky markets, volatile markets and hyperinflation are a part of his research papers. He felt with the increased globalization the economies are becoming interdependent and this leads to a cyclical transfer of capitals and transactions. As per the sticky markets he felt that there existed two types of goals: ?Internationally traded: The prices of such commodities are flexible and hence they adapt with the exchange rate, with the country being the price taker.
An example could be that of the Indian crude oil import wherein barrels of oil are purchased with the dollar rate fluctuation. (Dornbusch ,2005) ?Internationally non traded: These are assumed to have sticky price that is they lowly stabilize with a period of time. An apt example could be that of insurance policies and mutual finds in a particular economy. (Rudiger Dornbusch, Sebastian Edwards ,1995) This monetary theory by him shows that the inflow of money in an economy also predicts some amount of deprecation.
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With these sticky prices the rate of inflation in an economy is always assumed to be lesser than the monetary supply enhancement. Hence Dornbusch inferred that this increased money demand leads to price rise stability in a sticky market. According to him an excess of monetary inflow will lead a rise in bond prices and hence lower the bond yield in any fiscal set up. This leads to a depreciated currency value in the international exchange market. This increases the price of the tradable goods compared to the monetary in flow.
This and a comparatively lesser interest rate also help to asseverate the short-run balance of money demand and supply chain and hence the non-traded goods prices experience a rise. This hence makes the exchange rate move up in proportion to the money supply. This is what according to Dornbusch as foreseen in the collapse of the Mexican Peso. The balance of money is maintained by the fixed rate of domestic prices. (Rudiger Dornbusch, James M. Poterba ,1999) In volatile markets of emerging countries he felt that the IMF strategy as best fitted and reduced the financial bleed and lead to currency recovery.
The credibility of this Dornbausch view is supported by the normalization procedures that took place in Brazil and Korea. In volatile markets he felt that the combination duo of the pot collapse exchange rates and a credibility program leads to revaluing exchange rate and also a slump in the interest rate policies of the economy. But as per Dornbausch this set up is also tagged by a wavering commitment that always tends to reflect in such volatile markets. (Guido Di Tella, Rudiger Dornbusch ,1986)
If explained in simple terms in a sticky market scenario set up the Dornbausch model begins by marking so that prices of goods are ‘sticky’ or stable and are immune to any change and do not fluctuate in the short run, while the rates in financial markets adjust to disturbances and positive fluctuations quickly. Economists felt that the feature of volatility, from this linear perspective, could only be an aftermath of market impedimenta. Defying this proposition, Dornbusch debated on the fact that volatility is in fact more fundamental issue than it is mostly perceived. (Laurence D. Steinberg, Laurence Steinberg, Benson Bradford Brown, Sanford M. Dornbusch ,1997) Another example can be that the occurrences like the increase in monetary supply always adapt to the equilibrium between the commodity presence and its price. In any volatile market the initial picture is that of the steady price of goods due to the stickiness feature and the equilibrium is achieved through the balancing between the goods and price. With a gradual change the prices unstick and the equilibrium gets shifted to a new level. This also calls for a pricing structure in the economy.
He assumed that the investor in such markets are risk neutral. Richard E. Caves, Lawrence B. Krause, Rudiger Dornbusch ,1984) In volatile markets Dornbausch observed that the reaction to any fiscal fiasco leads to a change in this price commodity equilibrium. The capital market adapts well to such shifts where as a volatile market like that of the Thai economy or the Indian exchange takes time to adapt and assess the shifts. Overshooting is lesser in such markets where the change in monetary policy has a very significant change in the market exchange rates. (Rudiger Dornbusch ,1993) Thus these are Dornbausch’ study in reference to sticky and volatile market’ fiscal set up.