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Exchange Rate, Output and Macroeconomic Policy: A Structuralist Approach

Author

Listed:
  • Moumita Basu

    (Department of Economics, Krishnagar Government College, Krishnagar, Nadia, West Bengal, India.)

  • Ranjanendra Narayan Nag

    (St. Xavier's College (Autonomous), Kolkata-700016, India.)

  • Bhaskar Goswami

    (Department of Economics, University of Burdwan, India.)

Abstract

Current account imbalance and concomitant macroeconomic instability in emerging market economies have been major issues of recent macroeconomic modelling. This paper addresses these issues by asking how international interdependence has impinged on key macroeconomic variables and policy options. There are three assets: domestic bonds, foreign bonds and money. Domestic bonds and foreign bonds are imperfect substitutes due to presence of risk premium. The striking features of the model include endogenous risk premium and balance sheet effect on investment demand due to exchange rate depreciation. We use a simple open economy structuralist macro model that explains the interaction between current account adjustment and exchange rate dynamics. The balance sheet effect and the risk premium together explain how fiscal expansion or monetary expansion may have both short run and long run contractionary effect on the output level with worsening current account balance in the short run.

Suggested Citation

  • Moumita Basu & Ranjanendra Narayan Nag & Bhaskar Goswami, 2021. "Exchange Rate, Output and Macroeconomic Policy: A Structuralist Approach," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 60(2), pages 103-118.
    • Handle: RePEc:pid:journl:v:60:y:2021:i:2:p:103-118
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    References listed on IDEAS

    as
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    3. Syeda Qurat-ul-Ain & Saira Tufail, 2013. "The Effect of Oil Price Shocks on the Dynamic Relationship between Current Account and Exchange Rate: Evidence from D-8 Countries," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 52(4), pages 537-556.
    4. Aronovich, Selmo, 1999. "Country Risk Premium: Theoretical Determinants and Empirical Evidence for Latin American Countries," Revista Brasileira de Economia - RBE, EPGE Brazilian School of Economics and Finance - FGV EPGE (Brazil), vol. 53(4), October.
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    More about this item

    Keywords

    Current Account; Exchange Rate; Risk Premium; Balance Sheet Effect;
    All these keywords.

    JEL classification:

    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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