Response to Peter Dorman (hi, BTW, hope all's well that keeps
on keeping on):
Now you didn't have to get so technical on us did you? Getting
back to the origin of this with Ellen Frank's question, I think it
was addressed to what do we say to students, especially principles
students (higher level macro generally eschews AS-AD for other more
complicated lies, see exhanges on LTV, Sraffian prices, Walrasian
hooliganism, game theory games, and Marx on money magic, oops some
of those are micro,but the cool New-neo crowd sees all that as
"foundational" anyway (yet another lie, see Colander in Fall '93 EEJ
on "Macrofoundations of Micro")).
Yes, one can construct a pure classical model in which internal
price level changes are exactly offset by external exchange rate
changes. One can use this as part of a more general pure theory
critique of downward-sloping AD curves (PS to Ellen Frank: Nobody
is even remotely talking about horizontal AD's, how would they arise?
Horizontal AS is another story, the ultra-Keynesian one to be precise).
But I think when we talk to students we should have at least one foot
in "reality," whatever the ---- that might be.
It is not, I repeat NOT, anywhere near that pure classical model.
In fact, the foreign exchange markets are consistently the most
IRRATIONAL, wacko, screwball, speculative, wild and wooly markets
there are; absolutely crawling with anomalies, paradoxes, biases,
mysteries, bandwagons, meteor showers, hot flashes, and God knows
what else. For a very clear and quick summary of some of this mess,
I recommend the neat little piece by Ken Froot and Richard Thaler in
_Journal of Economic Perspectives_, Summer 1990, entitled, "Anomalies:
Foreign Exchange." For a more full-force discussion you can suffer
through Chapter 15 of my 1991 _From Catastrophe to Chaos: A General
Theory of Economic Discontinuities_, Boston: Kluwer.
Have a nice ride down a nearby AD curve!
Barkley Rosser
James Madison University
Harrisonburg, VA USA
