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Current Account, Exchange Rate, and Monetary Dynamics in a Stochastic Equilibrium Model

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  • Richard H. Clarida

Abstract

We construct a simple stochastic open-economy macro-economic model from the decision rules of rational optimizing agents, solving explicitly for the relationship between the model's deep parameters, and the variance-covariance matrix of equilibrium returns on domestic and foreign assets. We use the model to study the dynamic relationship between exchange rate changes and current account flows in response to domestic monetary shocks, to establish the conditions under which exchange rate depreciations accompany current account deficits, and to investigate the link between time preference, risk aversion, and the dynamic exchange rate and current account response to monetary disturbances. The model generates current account time series which exhibit persistent deviations from balance, even for the special case in which domestic and foreign shocks are purely transitory.

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File URL: http://cowles.econ.yale.edu/P/cd/d06b/d0694.pdf
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Bibliographic Info

Paper provided by Cowles Foundation for Research in Economics, Yale University in its series Cowles Foundation Discussion Papers with number 694.

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Length: 31 pages
Date of creation: Oct 1984
Date of revision:
Handle: RePEc:cwl:cwldpp:694

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Postal: Yale University, Box 208281, New Haven, CT 06520-8281 USA
Phone: (203) 432-3702
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Web page: http://cowles.econ.yale.edu/
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Postal: Cowles Foundation, Yale University, Box 208281, New Haven, CT 06520-8281 USA

Related research

Keywords: Current account; monetary shocks;

References

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  1. Helpman, Elhanan, 1981. "An Exploration in the Theory of Exchange-Rate Regimes," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 89(5), pages 865-90, October.
  2. Obstfeld, Maurice, 1981. "Macroeconomic Policy, Exchange-Rate Dynamics, and Optimal Asset Accumulation," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 89(6), pages 1142-61, December.
  3. Rodriguez, Carlos Alfredo, 1980. "The Role of Trade Flows in Exchange Rate Determination: A Rational Expectations Approach," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 88(6), pages 1148-58, December.
  4. Mussa, Michael, 1982. "A Model of Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 90(1), pages 74-104, February.
  5. Jeffrey D. Sachs, 1981. "The Current Account in the Eacroeconomic Adjustment Process," NBER Working Papers 0796, National Bureau of Economic Research, Inc.
  6. Dornbusch, Rudiger & Fischer, Stanley, 1980. "Exchange Rates and the Current Account," American Economic Review, American Economic Association, vol. 70(5), pages 960-71, December.
  7. William H. Branson, 1981. "Macroeconomic Determinants of Real Exchange Rates," NBER Working Papers 0801, National Bureau of Economic Research, Inc.
  8. Anderson, Ronald W & Danthine, Jean-Pierre, 1981. "Cross Hedging," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 89(6), pages 1182-96, December.
  9. McCafferty, Stephen & Driskill, Robert, 1980. "Problems of Existence and Uniqueness in Nonlinear Rational Expectations Models," Econometrica, Econometric Society, Econometric Society, vol. 48(5), pages 1313-17, July.
  10. Lucas, Robert E, Jr, 1980. "Methods and Problems in Business Cycle Theory," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 12(4), pages 696-715, November.
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