Adjustment Of Financial Assets Under An Open Economy

Issues on economic fluctuation and adjustment have always been hot and difficult in the research of economic theory. The economic fluctuation theory contains mainly two aspects: the first involves in the reason of economic fluctuation and the second involves in the effect of economic stabilization policy. So we can nearly find the content of economic fluctuation and adjustment theory everywhere in the study of macroeconomic problem and researches on these issues have great value for the development of basic economic theory and policy maker.After giving a general introduction of economic adjustment problem, I show some important analyses of classic economic adjustment theory and several reviews of my own on these analyses in the second part of this paper. In the analyses of "Real Business Cycle Model" economic fluctuation was interpreted as a result of productivity shocks. The "Diamond Model" and "Ramsey Model" including productivity shocks can show the effect on output and the functional mechanism of these shocks. King Robert and Charles Plosser studied the adjustment problem from demand side. They explained how endogenous monetary policy could affect the output. Lucas Robert and Phelps Edmund developed this review in their successive researches. Keynesianism started their economic adjustment theory from analyzing the stickiness of nominal wages and prices. They believe that due to the existence of nominal stickiness prices adjust gradually to the changes of aggregate demand, and nominal shocks have persistent effect on output. Fischer Stanley, Taylor John, Caplin Andrew S. and Spulber Daniel F. studied the real effects of three different kinds of nominal stickiness and demonstrated the staged adjustment process of nominal shocks. But lacking of microeconomicbehavior foundation Keynesianism experienced a hard time in 1970s. After having done some microeconomic studies, Keynesianism regained its status in 1990s. "Menu Cost Model", "Producer Reputation Model" and "Asymmetrical Response Model with Search Costs" provide price stickiness with microeconomic behavior foundations respectively from three different aspects. These studies enforced the logical relationships of economic adjustment theory of Keynesianism.With the opening of national market and globalization of the economy, the domestic economy is affected not only by the internal shocks and domestic policy but also by the economic policy of other countries. After the corruption of fixed exchange rate system, exchange rate fluctuates frequently and sometimes violently. In the third part of this paper, I establish a general equilibrium model in open economy including nominal stickiness and imperfect information in it. The model shows how nominal stickiness and imperfect information affect the adjustment process of nominal exchange rate, trade terms and nominal interest rate spread, and demonstrates the specific dynamics of these variables. The model established in the third part should not be treated as an integral adjustment theory. It is just a model, which develops the classic economic adjustment theory by including some financial variables. That means it is only the application of nominal stickiness model in open economy. But though introducing these financial factors, we will find a more complicated and rich dynamics. After introducing the classic economic adjustment theory and applying them in open economy, I make a brief conclusion on economic adjustment issue and show their implications in the last part of this paper.