Abstract
The literature on small open-economy macroeconomic models has concentrated on nominal shoc ks to a model with sluggish goods markets and a forward-looking excha nge market. This paper considers generalizations of these models to c ases of significant wealth effects of external trade imbalance and im perfect asset substitut-ability in the market for foreign exchange. I t shows that a number of standard results, due initially to R. A. Mun dell and J. M. Fleming, are modified significantly in these cases. Fu rthermore, it shows that real, as well as nominal, shocks can explain the high variability of the real exchange rate. Copyright 1987 by Blackwell Publishers Ltd and The Victoria University of Manchester
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