Chu, Ke-young, and Thomas K. Morrison, “World Non-Oil Primary Commodity Markets: A Medium-Term Framework of Analysis,” Staff Papers, International Monetary Fund (Washington), Vol. 33 (March 1986), pp. 139–84.
Frankel, Jeffrey A., “Expectations and Commodity Price Dynamics: The Over-shooting Model,” American Journal of Agricultural Economics (Lexington, Kentucky), Vol. 68 (May 1986), pp. 344–48.
Goodfriend, Marvin, “Interest Rate Smoothing and Price Level Trend-Stationarity,” Journal of Monetary Economics (Amsterdam), Vol. 19 (May 1987), pp. 335–48.
Mr. Sephton is Assistant Professor of Economics at the University of New Brunswick, Fredericton, New Brunswick, Canada. He is a graduate of McMaster University, Hamilton, Ontario, and of Queen’s University, Kingston, Ontario.
This relation suggests that the model applies to nations that have a strong interest in the evolution of agricultural commodity prices—for example, developing countries whose export earnings represent a substantial fraction of gross domestic product.
I assume that λ1 = 0 and c2 = 1; that is, money growth does not respond to interest rate forecasting errors, and money demand is unit elastic in real income.