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The Capitalization of Income Streams and the Effects of Open Market Policy under Fixed Exchange Rates

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Maurice Obstfeld

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Abstract

This paper investigates the long- and short-run neutrality of open-market monetary policy in a world of fixed exchange rates and imperfect substitutability between bonds denominated in different currencies. Using an illustrative portfolio-balance model, it shows that when the public discounts the future tax liabilities associated with the national debt and the central bank supports the exchange rate by trading non-interest-bearing foreign assets, open-market policy has a short-run effect, but no long-run effect, on the domestic price level and interest rate. When the foreign-exchange intervention assets earn interest that is rebated to and capitalized by the public, open-market policy loses even its short-run efficacy -- the capital-account offset to monetary policy is complete.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 0528.

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Date of creation: May 1982
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Handle: RePEc:nbr:nberwo:0528

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Frenkel, Jacob A & Rodriguez, Carlos Alfredo, 1975. "Portfolio Equilibrium and the Balance of Payments: A Monetary Approach," American Economic Review, American Economic Association, vol. 65(4), pages 674-88, September. [Downloadable!] (restricted)
  2. Obstfeld, Maurice, 1980. "Imperfect asset substitutability and monetary policy under fixed exchange rates," Journal of International Economics, Elsevier, vol. 10(2), pages 177-200, May. [Downloadable!] (restricted)
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  3. 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. [Downloadable!] (restricted)
  4. Boyer, Russel S., 1979. "Sterilization and the monetary approach to balance of payments analysis," Journal of Monetary Economics, Elsevier, vol. 5(2), pages 295-300, April. [Downloadable!] (restricted)
  5. Barro, Robert J, 1974. "Are Government Bonds Net Wealth?," Journal of Political Economy, University of Chicago Press, vol. 82(6), pages 1095-1117, Nov.-Dec.. [Downloadable!] (restricted)
  6. Robert A. Mundell, 1960. "The Public Debt, Corporate Income Taxes, and the Rate of Interest," Journal of Political Economy, University of Chicago Press, vol. 68, pages 622. [Downloadable!] (restricted)
  7. 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. [Downloadable!] (restricted)
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  1. Michael Kumhof & Stijn van Nieuwerburgh, 2007. "Monetary Policy in an Equilibrium Portfolio Balance Model," IMF Working Papers 07/72, International Monetary Fund. [Downloadable!]
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  2. Maurice Obstfeld, 1983. "Exchange Rates, Inflation and the Sterilization Problem: Germany, 1975-1981," NBER Working Papers 0963, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  3. David K. Backus & Patrick J. Kehoe, 1988. "On the denomination of government debt: a critique of the portfolio balance approach," Staff Report 116, Federal Reserve Bank of Minneapolis. [Downloadable!]
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  4. Christelle Lecourt & Helene Raymond, 2006. "Central bank interventions in industrialized countries: a characterization based on survey results," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 11(2), pages 123-138. [Downloadable!]
  5. Maurice Obstfeld, 1980. "Imperfect Asset Substitutability and Monetary Policy under Fixed Exchange Rates," NBER Working Papers 0485, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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