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Exchange Rates and Adjustment: Perspectives from the New Open Economy Macroeconomics

  • Obstfeld, Maurice

The New Open Economy Macroeconomics has allowed economists to tackle classical problems with new tools, while also generating new ideas and questions. In their attempts to make the new models capture empirical regularities, researchers have entertained a variety of assumptions about the international pricing of goods, notably, models of pricing to market and destination-currency pricing of exports. Some of the resulting models imply that exchange-rate changes lack international expenditure-switching effects, and they thus appear to call for a radical rethinking of the role of exchange rates in international adjustment. This Paper argues that the recent resurgence of exchange-rate pessimism stems from oversimplified modeling strategies rather than from evidence. Like earlier episodes starting with the extreme ‘elasticity pessimism’ of the early postwar era, it is based on a misinterpretation of the empirical record.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 3533.

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Date of creation: Sep 2002
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Handle: RePEc:cpr:ceprdp:3533
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  1. Robert C. Feenstra, . "Integration Of Trade And Disintegration Of Production In The Global Economy," Department of Economics 98-06, California Davis - Department of Economics.
  2. William H. Branson & Julio J. Rotemberg, 1979. "International Adjustment with Wage Rigidity," NBER Working Papers 0406, National Bureau of Economic Research, Inc.
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  4. Rudiger Dornbusch, 1985. "Exchange Rates and Prices," NBER Working Papers 1769, National Bureau of Economic Research, Inc.
  5. Guillermo A. Calvo & Carmen M. Reinhart, 2002. "Fear of Floating," The Quarterly Journal of Economics, Oxford University Press, vol. 117(2), pages 379-408.
  6. Charles Engel, 1995. "Accounting for U.S. Real Exchange Rate Changes," NBER Working Papers 5394, National Bureau of Economic Research, Inc.
  7. Obstfeld, Maurice & Rogoff, Kenneth, 2000. "New directions for stochastic open economy models," Journal of International Economics, Elsevier, vol. 50(1), pages 117-153, February.
  8. Avinash Dixit, 1989. "Hysteresis, Import Penetration, and Exchange Rate Pass-Through," The Quarterly Journal of Economics, Oxford University Press, vol. 104(2), pages 205-228.
  9. Cedric Tille, 2002. "How valuable is exchange rate flexibility? Optimal monetary policy under sectoral shocks," Staff Reports 147, Federal Reserve Bank of New York.
  10. Giancarlo Corsetti & Luca Dedola, 2002. "Macroeconomics of international price discrimination," Temi di discussione (Economic working papers) 461, Bank of Italy, Economic Research and International Relations Area.
  11. Pinelopi Koujianou Goldberg & Michael M. Knetter, 1997. "Goods Prices and Exchange Rates: What Have We Learned?," Journal of Economic Literature, American Economic Association, vol. 35(3), pages 1243-1272, September.
  12. Benigno, Gianluca & Benigno, Pierpaolo, 2001. "Price Stability as a Nash Equilibrium in Monetary Open-Economy Models," CEPR Discussion Papers 2757, C.E.P.R. Discussion Papers.
  13. Mario I. Blejer & Mohsin S. Khan & Paul R. Masson, 1995. "Early Contributions of “Staff Papers” to International Economics," IMF Staff Papers, Palgrave Macmillan, vol. 42(4), pages 707-733, December.
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