Imperfect Asset Substitutability and Monetary Policy Under Fixed Exchange Rates

24 Pages Posted: 26 May 2004

See all articles by Maurice Obstfeld

Maurice Obstfeld

University of California, Berkeley; Peterson Institute for International Economics; National Bureau of Economic Research; Centre for Economic Policy Research

Date Written: June 1980


This paper presents a long-run model of the open economy in a world of fixed exchange rates and imperfect substitutability between bonds denominated in different currencies. The model explicitly accounts for the wealth flow accompanying current-account imbalance and for the flow of interest payments associated with international lending. Both the dynamic and steady-state implications of the model are quite different from those of models that specify the capital account as a continuing flow responding to the level of interest rates. In particular, we find that when there exists outside government debt, open-market policy is not in general neutral in the long run. We also find conditions under which the central bank is able to hold the domestic price level constant in the face of an inflationary disturbance from abroad without exhausting, in the long run, its stock of domestic assets.

Suggested Citation

Obstfeld, Maurice, Imperfect Asset Substitutability and Monetary Policy Under Fixed Exchange Rates (June 1980). NBER Working Paper No. w0485. Available at SSRN:

Maurice Obstfeld (Contact Author)

University of California, Berkeley ( email )

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Berkeley, CA 94720
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Peterson Institute for International Economics ( email )

1750 Massachusetts Avenue, NW
Washington, DC 20036
United States

National Bureau of Economic Research ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research ( email )

United Kingdom

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