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Exchange Rate and Current Account Dynamics under Rational Expectations: An Econometric Analysis

  • Papell, David H

An econometric portfolio balance model of an open economy, incorporating exchange rate, price, and current account dynamics, is derived and estimated.The usual stability conditions do not guarantee a unique rational expectations solution, and several proposals for resolving this situation are considered. Using constrained maximum likelihood methods, the model is estimated for Japan.The estimation results indicate that the model is quite successful in explaining the patterns found in the data. The model is estimated using several methods of resolving the question of non-uniqueness, and the results are compared.

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Article provided by Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association in its journal International Economic Review.

Volume (Year): 27 (1986)
Issue (Month): 3 (October)
Pages: 583-600

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Handle: RePEc:ier:iecrev:v:27:y:1986:i:3:p:583-600
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  1. Driskill, Robert, 1980. "Exchange Rate Dynamics, Portfolio Balance, and Relative Prices," American Economic Review, American Economic Association, vol. 70(4), pages 776-83, September.
  2. Jeffrey D. Sachs, 1981. "The Current Account and macroeconomic Adjustment in the 1970s," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 12(1), pages 201-282.
  3. Jonathan Eaton & Stephen J. Turnovsky, 1982. "Covered Interest Parity, Uncovered Interest Parity, and Exchange Rate Dynamics," NBER Working Papers 0984, National Bureau of Economic Research, Inc.
  4. Bennett T. McCallum, 1981. "On Non-Uniqueness in Rational Expectations Models: An Attempt at Perspective," NBER Working Papers 0684, National Bureau of Economic Research, Inc.
  5. Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, vol. 48(1), pages 1-48, January.
  6. Maurice Obstfeld, 1983. "Intertemporal Price Speculation and the Optimal Current-Account Deficit," NBER Working Papers 1100, National Bureau of Economic Research, Inc.
  7. Taylor, John B, 1977. "Conditions for Unique Solutions in Stochastic Macroeconomic Models with Rational Expectations," Econometrica, Econometric Society, vol. 45(6), pages 1377-85, September.
  8. Thomas J. Sargent, 1978. "Estimation of dynamic labor demand schedules under rational expectations," Staff Report 27, Federal Reserve Bank of Minneapolis.
  9. -, 1983. "Notas sobre la economía brasileña en 1982," Oficina de la CEPAL en Brasilia (Estudios e Investigaciones) 28369, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL).
  10. anonymous, 1983. "International economic situation and outlook," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 46, january/f.
  11. anonymous, 1983. "New Zealand economic chronology 1982," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 46, january/f.
  12. Dornbusch, Rudiger & Fischer, Stanley, 1980. "Exchange Rates and the Current Account," American Economic Review, American Economic Association, vol. 70(5), pages 960-71, December.
  13. anonymous, 1983. "The budget and macro-economic policy," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 46, september.
  14. Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1161-76, December.
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