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Macroeconomic Policy, Exchange-Rate Dynamics, and Optimal Asset Accumulation

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  • Obstfeld, Maurice

Abstract

The paper develops a model of exchange-rate and current-account determination for a small economy peopled by infinitely lived, utility-maximizing households. In this setting, a central-bank purchase of foreign exchange has no real effects when central-bank foreign reserves earn interest at the world rate and the proceeds are returned to the public. In contrast, an increase in the monetary growth rate does have real effects, even in the long run. The model developed here implies that an increase in government spending may lead to a surplus on current account. The external adjustment process predicted by the model is one in which consumption, real balances, anti external assets all rise or fall simultaneously.
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Suggested Citation

  • Obstfeld, Maurice, 1981. "Macroeconomic Policy, Exchange-Rate Dynamics, and Optimal Asset Accumulation," Journal of Political Economy, University of Chicago Press, vol. 89(6), pages 1142-1161, December.
  • Handle: RePEc:ucp:jpolec:v:89:y:1981:i:6:p:1142-61
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    References listed on IDEAS

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    1. Fischer, Stanley, 1979. "Capital Accumulation on the Transition Path in a Monetary Optimizing Model," Econometrica, Econometric Society, vol. 47(6), pages 1433-1439, November.
    2. Stockman, Alan C, 1980. "A Theory of Exchange Rate Determination," Journal of Political Economy, University of Chicago Press, vol. 88(4), pages 673-698, August.
    3. Calvo, Guillermo A & Rodriguez, Carlos Alfredo, 1977. "A Model of Exchange Rate Determination under Currency Substitution and Rational Expectations," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 617-625, June.
    4. Calvo, Guillermo A, 1979. "On Models of Money and Perfect Foresight," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 20(1), pages 83-103, February.
    5. Findlay, Ronald, 1978. "An "Austrian" Model of International Trade and Interest Rate Equalization," Journal of Political Economy, University of Chicago Press, vol. 86(6), pages 989-1007, December.
    6. Kouri, Pentti J K, 1976. " The Exchange Rate and the Balance of Payments in the Short Run and in the Long Run: A Monetary Approach," Scandinavian Journal of Economics, Wiley Blackwell, vol. 78(2), pages 280-304.
    7. Calvo, Guillermo & Findlay, Ronald, 1978. "On the optimal acquisition of foreign capital through investment of oil export revenues," Journal of International Economics, Elsevier, vol. 8(4), pages 513-524, November.
    8. Brock, William A, 1974. "Money and Growth: The Case of Long Run Perfect Foresight," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 15(3), pages 750-777, October.
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