Macroeconomic Policy, Exchange-Rate Dynamics, and Optimal Asset Accumulation

21 Pages Posted: 9 Jun 2004 Last revised: 23 Aug 2010

See all articles by Maurice Obstfeld

Maurice Obstfeld

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

Date Written: December 1980

Abstract

The paper develops a model of exchange-rate and current-account determination for a small economy peopled by infinitely lived, utility-maximizing households. In this setting, a central-bank purchase of foreign exchange has no real effects when central-bank foreign reserves earn interest at the world rate and the proceeds are returned to the public. In contrast, an increase in the monetary growth rate does have real effects, even in the long run. The model developed here implies that an increase in government spending may lead to a surplus on current account. The external adjustment process predicted by the model is one in which consumption, real balances, anti external assets all rise or fall simultaneously.

Suggested Citation

Obstfeld, Maurice, Macroeconomic Policy, Exchange-Rate Dynamics, and Optimal Asset Accumulation (December 1980). NBER Working Paper No. w0599. Available at SSRN: https://ssrn.com/abstract=275360

Maurice Obstfeld (Contact Author)

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

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