Exchange Rates and Adjustment: Perspectives from the New Open Economy Macroeconomics

39 Pages Posted: 23 Aug 2002 Last revised: 9 Oct 2002

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)

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Date Written: August 2002

Abstract

The New Open Economy Macroeconomics has allowed economists to tackle classical problems with new tools, while also generating new ideas and questions. In their attempts to make the new models capture empirical regularities, researchers have entertained a variety of assumptions about the international pricing of goods, notably, models of pricing to market and destination-currency pricing of exports. Some of the resulting models imply that exchange-rate changes lack international expenditure-switching effects, and they thus appear to call for a radical rethinking of the role of exchange rates in international adjustment. This paper argues that the recent resurgence of exchange-rate pessimism stems from oversimplified modeling strategies rather than from evidence. Like earlier episodes starting with the extreme 'elasticity pessimism' of the early postwar era, it is based on a misinterpretation of the empirical record.

Suggested Citation

Obstfeld, Maurice, Exchange Rates and Adjustment: Perspectives from the New Open Economy Macroeconomics (August 2002). NBER Working Paper No. w9118. Available at SSRN: https://ssrn.com/abstract=325944

Maurice Obstfeld (Contact Author)

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