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Open-Economy Macroeconomics, Developments in Theory and Policy

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  • Maurice Obstfeld

Abstract

This paper surveys recent research in open-economy macroeconomics, using questions raised by European economic and monetary unification to guide the topics discussed. A striking empirical regularity is the tendency for changes in the nominal exchange rate regime systematically to affect the variability of nominal and real exchange rates alike. This regularity (which disappears in high-inflation conditions) can be explained by sticky-price theories or by models of asset-market liquidity effects. But plausible liquidity models have difficulty generating enough persistence (in output and real exchange rates, in particular) to match the data. So the macroeconomic costs of giving up the exchange-rate realignment option, emphasized in Mundell's optimum currency area concept, seem empirically relevant. The paper discusses other possible costs of currency unification, associated with a reduced number of asset markets. On the benefit side, our theories of the efficiencies due to a common currency remain unsatisfactory, despite recent advances. A key motivation for the choice of a common currency over a fixed exchange rate between national currencies is the fear of speculative attack. The paper concludes by showing how self-fulfilling currency crises can occur, and describes recent progress in narrowing the range of multiple equilibria in adjustable-peg regimes.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 6319.

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Date of creation: Jun 1999
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Publication status: published as Scandinavian Journal of Economics, vol. 100, no. 1, pp. 247-275, 1998
Handle: RePEc:nbr:nberwo:6319

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  1. Helpman, Elhanan & Razin, Assaf, 1982. "A Comparison of Exchange Rate Regimes in the Presence of Imperfect Capital Markets," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 23(2), pages 365-88, June.
  2. Miles S. Kimball & Michael Woodford, 1994. "The quantitative analysis of the basic neomonetarist model," Proceedings, Federal Reserve Bank of Cleveland, pages 1241-1289.
  3. Charles Engel & John H. Rogers, 1995. "Regional Patterns in the Law of One Price: The Roles of Geography vs. Currencies," NBER Working Papers 5395, National Bureau of Economic Research, Inc.
  4. Alan C. Stockman, 1988. "Real Exchange Rate Variability under Pegged and Floating Nominal Exchange Rate Systems: An Equilibrium Theory," NBER Working Papers 2565, National Bureau of Economic Research, Inc.
  5. Grilli, Vittorio & Roubini, Nouriel, 1992. "Liquidity and exchange rates," Journal of International Economics, Elsevier, vol. 32(3-4), pages 339-352, May.
  6. Julio J. Rotemberg, 1982. "Money and the Terms of Trade," NBER Working Papers 1003, National Bureau of Economic Research, Inc.
  7. Obstfeld, Maurice & Taylor, Alan M, 1997. "Nonlinear Aspects of Goods-Market Arbitrage and Adjustment: Heckscher's Commodity Points Revisited," CEPR Discussion Papers 1672, C.E.P.R. Discussion Papers.
  8. Schlagenhauf, Don E. & Wrase, Jeffrey M., 1995. "Liquidity and real activity in a simple open economy model," Journal of Monetary Economics, Elsevier, vol. 35(3), pages 431-461, June.
  9. Kenneth Rogoff, 1996. "The Purchasing Power Parity Puzzle," Journal of Economic Literature, American Economic Association, vol. 34(2), pages 647-668, June.
  10. Alvarez, Fernando & Atkeson, Andrew, 1997. "Money and exchange rates in the Grossman-Weiss-Rotemberg model," Journal of Monetary Economics, Elsevier, vol. 40(3), pages 619-640, December.
  11. Mussa, Michael, 1982. "A Model of Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 90(1), pages 74-104, February.
  12. Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262150476, December.
  13. Graciela L. Kaminsky & Carmen M. Reinhart, 1996. "The twin crises: the causes of banking and balance-of-payments problems," International Finance Discussion Papers 544, Board of Governors of the Federal Reserve System (U.S.).
  14. Maurice Obstfeld, 1995. "Models of Currency Crises with Self-Fulfilling Features," NBER Working Papers 5285, National Bureau of Economic Research, Inc.
  15. Romer, David, 1987. "The monetary transmission mechanism in a general equilibrium version of the baumol-tobin model," Journal of Monetary Economics, Elsevier, vol. 20(1), pages 105-122, July.
  16. Francesco Giavazzi & Marco Pagano, 1991. "The Advantage of Tying One's Hands: EMS Discipline and Central Bank Credibility," NBER Chapters, in: International Volatility and Economic Growth: The First Ten Years of The International Seminar on Macroeconomics, pages 303-330 National Bureau of Economic Research, Inc.
  17. Dowd, Kevin & Greenaway, David, 1993. "Currency Competition, Network Externalities and Switching Costs: Towards an Alternative View of Optimum Currency Areas," Economic Journal, Royal Economic Society, vol. 103(420), pages 1180-89, September.
  18. Kollmann, R., 1996. "The Exchange rate in a Dynamic-Optimizing Current Account Model with Nominal Rigidities: A Quantitative Investigation," Discussion Paper 1996-67, Tilburg University, Center for Economic Research.
  19. Lucas, Robert Jr., 1990. "Liquidity and interest rates," Journal of Economic Theory, Elsevier, vol. 50(2), pages 237-264, April.
  20. Lucas, Robert Jr., 1982. "Interest rates and currency prices in a two-country world," Journal of Monetary Economics, Elsevier, vol. 10(3), pages 335-359.
  21. Krugman, Paul, 1979. "A Model of Balance-of-Payments Crises," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 11(3), pages 311-25, August.
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