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

41 Pages Posted: 11 Oct 2002

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

Multiple version iconThere are 2 versions of this paper

Date Written: September 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.

Keywords: Exchange rate policy, international adjustment, expenditure-switching effects, elasticity pessimism, international competitiveness

JEL Classification: F31, F32, F41

Suggested Citation

Obstfeld, Maurice, Exchange Rates and Adjustment: Perspectives from the New Open Economy Macroeconomics (September 2002). CEPR Discussion Paper No. 3533. Available at SSRN: https://ssrn.com/abstract=338180

Maurice Obstfeld (Contact Author)

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Centre for Economic Policy Research ( email )

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