The small-country model presented in Chapter 2 has three classes of solutions. For each disturbance or policy change, we must first obtain the impact or instantaneous effects on goods prices, income, the interest rate, and the exchange rate or reserves (depending on the choice of exchange-rate regime). Thereafter, we must prove stability and solve for the dynamic effects of the disturbances–effects that depend on the way in which disturbances influence the level of saving or the current-account balance. Finally, we must solve for the change in the stock of wealth that results from the saving or dissaving that takes place on the way to the new steady state. Two sets of solutions are required at each stage–one for a flexible exchange rate and another for a pegged exchange rate.

We make no attempt to interpret our results in this chapter. The signs of the responses to disturbances and policies are summarized in tables, but economic explanations are deferred to Chapters 4, 5, and 6. In Chapters 4 and 5 we study in detail comparative statics, looking at disturbances and policies one at a time and contrasting the effects of flexible and pegged exchange rates. In Chapter 6 we examine the dynamics of our model to show how it converges eventually to a stationary state and to illustrate the crucial role of the exchange-rate regime in determining the path of the economy.