This paper develops a flexible price, two-sector growth model with a nominal side to study
the role of the exchange rate in transition dynamics. We adopt a standard small open
economy model with traded and nontraded goods, where the engines of growth are
exogenous productivity improvements and capital accumulation. We enhance this standard
framework by adding a preference for real money holdings, captured by money-in-the-utility.
We follow Schmitt-Grohé and Uribe (2003) and assume that the interest rate on bonds …