Abstract
The model presented in this paper is characterized by rational expectations, sticky prices, imperfect capital substitution, separate policy functions for domestic credit and credit and reserves, and variable sterilization. Monetary, intervention, and sterilization policies offer complex tradeoffs between internal and external objectives; sterilization dampens exchange rate and price changes due to intervention, but magnifies short-run changes due to foreign interest rate shocks; the ratio of exchange rate to price changes due to intervention rises at an increasing rate with the degree of sterilization; and changes in domestic credit induce long-run purchasingn power parity, but exogeneous changes in reserves, income, or the foreign interest rate do not.
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