Exchange Rate Dynamics Redux

36 Pages Posted: 27 Aug 2000  

Maurice Obstfeld

University of California, Berkeley - Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Kenneth Rogoff

Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: April 1994

Abstract

Until now, thinking on open economy macroeconomics has been largely schizophrenic. When it comes to analyzing exchange rate dynamics, an empirically-minded economist abandons modern current account models which, while theoretically coherent, fail to address the awkward reality of sticky nominal prices. In this paper we develop an analytically tractable two-country model that marries a full account of dynamics to a supply framework based on monopolistic competition and sticky prices. It offers simple and intuitive predictions about exchange rates and current accounts that sometimes differ sharply from those of either modern flexible-price intertemporal models, or traditional sticky-price Keynesian models. The model also leads to a novel perspective on the international welfare spillovers of monetary and fiscal policies.

Suggested Citation

Obstfeld, Maurice and Rogoff, Kenneth, Exchange Rate Dynamics Redux (April 1994). NBER Working Paper No. w4693. Available at SSRN: https://ssrn.com/abstract=226979

Maurice Obstfeld (Contact Author)

University of California, Berkeley - Department of Economics ( email )

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HOME PAGE: http://emlab.berkeley.edu/users/obstfeld/

Centre for Economic Policy Research (CEPR)

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National Bureau of Economic Research (NBER)

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Kenneth S. Rogoff

Harvard University - Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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