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Macroeconomic Policies and Foreign Asset Accumulation in a Finite-Horizon Model

Author Info

  • Xiaoyong Cui

    (CEMA, Central University of Finance and Economics)

  • Liutang Gong

    (Guanghua School of Management, Peking University)

  • Ziguan Zhuang

    (Economics and Management School, Wuhan University)

Abstract

This paper considers foreign asset holdings and macroeconomic policies in a finite-horizon model with real balances and foreign asset holdings in a small open economy. Both the long- and short-run effects of these macroeconomic policies on the economy are reexamined. The main results stand in striking contrast to those of Obstfeld (1981), who used an endogenous time preference. (1) Foreign exchange intervention leads to more foreign asset holdings and more consumption in the long run. However, it affects foreign asset accumulation ambiguously. (2) Inflation results in more foreign asset accumulation and consumption, but the effect of inflation on real balance holdings is ambiguous. (3) Government spending affects foreign asset accumulation ambiguously, and it always reduces real balances and crowds out private consumption.

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Article provided by Society for AEF in its journal Annals of Economics and Finance.

Volume (Year): 9 (2008)
Issue (Month): 2 (November)
Pages: 293-313

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Handle: RePEc:cuf:journl:y:2008:v:9:i:2:p:293-313
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Keywords: Foreign asset; Finite-horizon model; Macroeconomic policies;

Find related papers by JEL classification:

  • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
  • H54 - Public Economics - - National Government Expenditures and Related Policies - - - Infrastructures
  • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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  1. Schmitt-Grohe, Stephanie & Uribe, Martin, 2003. "Closing small open economy models," Journal of International Economics, Elsevier, vol. 61(1), pages 163-185, October.
  2. Obstfeld, Maurice, 1981. "Macroeconomic Policy, Exchange-Rate Dynamics, and Optimal Asset Accumulation," Journal of Political Economy, University of Chicago Press, vol. 89(6), pages 1142-61, December.
  3. Matsuyama, Kiminori, 1987. "Current account dynamics in a finite horizon model," Journal of International Economics, Elsevier, vol. 23(3-4), pages 299-313, November.
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  7. Francis, J. & Kompas, T., 1998. "Uzawa's Transformation and Optimal Control Problems With Variable Rates of Time Preference," Papers 354, Australian National University - Department of Economics.
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  9. Stephen J. Turnovsky, 1985. "Domestic and Foreign Disturbances in an Optimizing Model of Exchange- Rate Determination," NBER Working Papers 1407, National Bureau of Economic Research, Inc.
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  11. Maurice Obstfeld, 1981. "Aggregate Spending and the Terms of Trade: Is There a Laursen-Metzler Effect?," NBER Working Papers 0686, National Bureau of Economic Research, Inc.
  12. Obstfeld, Maurice, 1990. "Intertemporal dependence, impatience, and dynamics," Journal of Monetary Economics, Elsevier, vol. 26(1), pages 45-75, August.
  13. Mendoza, Enrique G, 1995. "The Terms of Trade, the Real Exchange Rate, and Economic Fluctuations," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 36(1), pages 101-37, February.
  14. Olivier J. Blanchard, 1984. "Debt, Deficits and Finite Horizons," NBER Working Papers 1389, National Bureau of Economic Research, Inc.
  15. Weil, Philippe, 1991. "Is Money Net Wealth?," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 32(1), pages 37-53, February.
  16. Xiaoyong, Cui & Gong, Liutang, 2006. "Laplace transform methods for linearizing multidimensional systems," Economics Letters, Elsevier, vol. 90(2), pages 176-182, February.
  17. Judd, Kenneth L., 1982. "An alternative to steady-state comparisons in perfect foresight models," Economics Letters, Elsevier, vol. 10(1-2), pages 55-59.
  18. Saint-Paul, G., 1991. "Fiscal Policy In An Endogenous Growth Model," DELTA Working Papers 91-04, DELTA (Ecole normale supérieure).
  19. Dirk Muir & Douglas Laxton & Dennis P. J. Botman & Andrei Romanov, 2006. "A New-Open-Economy Macro Model for Fiscal Policy Evaluation," IMF Working Papers 06/45, International Monetary Fund.
  20. Chae-Deug Yi, 2003. "An Empirical Analysis of Ricardian Equivalence on Real Exchange Rate and Current Account: Korea," International Economic Journal, Taylor & Francis Journals, vol. 17(4), pages 61-83.
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