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Imperfect asset substitutability and monetary policy under fixed exchange rates

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  • Obstfeld, Maurice

Abstract

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.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of International Economics.

Volume (Year): 10 (1980)
Issue (Month): 2 (May)
Pages: 177-200

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Handle: RePEc:eee:inecon:v:10:y:1980:i:2:p:177-200

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Web page: http://www.elsevier.com/locate/inca/505552

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References

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  1. Robert P. Flood, 1977. "Growth, Prices, and the Balance of Payments," Canadian Journal of Economics, Canadian Economics Association, vol. 10(2), pages 193-207, May.
  2. Fratianni, Michele, 1976. "On the effectiveness of monetary policy under fixed rates of exchange," Journal of Monetary Economics, Elsevier, vol. 2(1), pages 63-79, January.
  3. Tsiang, S C, 1975. "The Dynamics of International Capital Flows and Internal and External Balance," The Quarterly Journal of Economics, MIT Press, vol. 89(2), pages 195-214, May.
  4. Henderson, Dale W, 1977. "Modeling the Interdependence of National Money and Capital Markets," American Economic Review, American Economic Association, vol. 67(1), pages 190-99, February.
  5. Barro, Robert J., 1974. "Are Government Bonds Net Wealth?," Scholarly Articles 3451399, Harvard University Department of Economics.
  6. Obstfeld, Maurice, 1982. "The capitalization of income streams and the effects of open-market policy under fixed exchange rates," Journal of Monetary Economics, Elsevier, vol. 9(1), pages 87-98.
  7. Willet, Thomas D & Forte, Francesco, 1969. "Interest Rate Policy and External Balance," The Quarterly Journal of Economics, MIT Press, vol. 83(2), pages 242-62, May.
  8. Kouri, Pentti J K & Porter, Michael G, 1974. "International Capital Flows and Portfolio Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 82(3), pages 443-67, May/June.
  9. Robert A. Mundell, 1962. "The Appropriate Use of Monetary and Fiscal Policy for Internal and External Stability," IMF Staff Papers, Palgrave Macmillan, vol. 9(1), pages 70-79, March.
  10. Johnson, Harry G, 1974. "Major Issues in Monetary Economics," Oxford Economic Papers, Oxford University Press, vol. 26(2), pages 212-25, July.
  11. Levin, Jay H, 1972. "International Capital Mobility and the Assignment Problem," Oxford Economic Papers, Oxford University Press, vol. 24(1), pages 54-67, March.
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Citations

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Cited by:
  1. Maurice Obstfeld, 1993. "The Adjustment Mechanism," NBER Working Papers 3943, National Bureau of Economic Research, Inc.
    • Maurice Obstfeld, 1993. "The Adjustment Mechanism," NBER Chapters, in: A Retrospective on the Bretton Woods System: Lessons for International Monetary Reform, pages 201-268 National Bureau of Economic Research, Inc.
  2. Maurice Obstfeld, 1982. "The Capitalization of Income Streams and the Effects of Open Market Policy under Fixed Exchange Rates," NBER Working Papers 0528, National Bureau of Economic Research, Inc.
  3. Agnès Bénassy-Quéré & Benjamin Carton & Ludovic Gauvin, 2011. "Rebalancing Growth in China: An International Perspective," Working Papers 2011-08, CEPII research center.
  4. William H. Branson & Willem H. Buiter, 1983. "Monetary and Fiscal Policy with Flexible Exchange Rates," NBER Working Papers 0901, National Bureau of Economic Research, Inc.
  5. Martin Feldstein, 1991. "Domestic Saving and International Capital Movements in the Long Run and the Short Run," NBER Chapters, in: International Volatility and Economic Growth: The First Ten Years of The International Seminar on Macroeconomics, pages 331-353 National Bureau of Economic Research, Inc.
  6. Jeffrey D. Sachs, 1982. "Aspects of the Current Account Behavior of OECD Economies," NBER Working Papers 0859, National Bureau of Economic Research, Inc.
  7. Pekka Ahtiala, 1981. "Economic Policy in an Open Macro Model with Rational Labor Behavior," Discussion Papers 487, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  8. Maurice Obstfeld, 1983. "Exchange Rates, Inflation and the Sterilization Problem: Germany, 1975-1981," NBER Working Papers 0963, National Bureau of Economic Research, Inc.
  9. Sung Yeung Kwack, 2001. "An Empirical Assessment Of Monetary Policy Responses To Capital Inflows In Asia Before The Financial Crisis," International Economic Journal, Taylor & Francis Journals, vol. 15(1), pages 95-113.

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