The mathematical analysis in Chapter 3 focused by turns on classes of responses. It dealt sequentially with impact, dynamic, and steady-state effects under flexible and pegged exchange rates. We have now to reorganize and interpret the results–to ask how each disturbance or policy change affects the economy, to explain the processes activated in each instance, and to study the role of the exchange-rate regime. We have also to ask how the various responses are influenced by economic structure and behavior in the goods and asset markets, especially to ask in what measure they depend on the degree of substitutability between pairs of goods and between domestic and foreign bonds.

To avoid excessive repetition, we split our task into two parts. In this chapter and the next, we study comparative statics. Looking at disturbances and policy changes one at a time, we ask how the economy adapts on impact and in the steady state and how its adaptations are affected by the exchange-rate regime and by degrees of substitutability in goods and asset markets. In Chapter 6 we look at behavior over time to see how the impact effects of a disturbance give way to the steady-state effects.

Under the assumptions adopted in Chapter 2, notably those that govern the demand for money, events in goods markets do not impinge immediately on asset markets. It is therefore possible to isolate a set of disturbances and policy changes that have no impact effects on the domestic interest rate, the exchange rate, or reserves, because they originate in the goods markets.