The Capitalization of Income Streams and the Effects of Open Market Policy Under Fixed Exchange Rates

19 Pages Posted: 15 Aug 2001 Last revised: 21 Apr 2005

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: August 1980

Abstract

This paper investigates the long- and short-run neutrality of open-market monetary policy in a world of fixed exchange rates and imperfect substitutability between bonds denominated in different currencies. Using an illustrative portfolio-balance model, it shows that when the public discounts the future tax liabilities associated with the national debt and the central bank supports the exchange rate by trading non-interest-bearing foreign assets, open-market policy has a short-run effect, but no long-run effect, on the domestic price level and interest rate. When the foreign-exchange intervention assets earn interest that is rebated to and capitalized by the public, open-market policy loses even its short-run efficacy -- the capital-account offset to monetary policy is complete.

Suggested Citation

Obstfeld, Maurice, The Capitalization of Income Streams and the Effects of Open Market Policy Under Fixed Exchange Rates (August 1980). NBER Working Paper No. w0528. Available at SSRN: https://ssrn.com/abstract=263408

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