SYMMETRY RESTRICTIONS AND THE SEMBLANCE OF NEUTRALITY IN EXCHANGE-RATE MODELS

This paper shows that tile symmetry restrictions commonly used to simp ly the two-country, sticky-price monetary setup are not necessary for tractability as previously thought. The paper also shows that the prac tice of using these restrictions has obscurred the true long-run prope rties of the sticky-price setup. The paper shows that although one-tim e changes in money in the standard models of Frankel and. Hooper and M orton lead to proportionate changes in the relative level of goods pri ces (i.e., domestic minus foreign), the absolute levels of these varia bles move disproportionately, with consequent movements in the steady- state levels of real interest rates and real money balances.