Current Account, Exchange Rate, and Monetary Dynamics in a Stochastic Equilibrium Model
We construct a simple stochastic open-economy macro-economic model from the decision rules of rational optimizing agents, solving explicitly for the relationship between the model's deep parameters, and the variance-covariance matrix of equilibrium returns on domestic and foreign assets. We use the model to study the dynamic relationship between exchange rate changes and current account flows in response to domestic monetary shocks, to establish the conditions under which exchange rate depreciations accompany current account deficits, and to investigate the link between time preference, risk aversion, and the dynamic exchange rate and current account response to monetary disturbances. The model generates current account time series which exhibit persistent deviations from balance, even for the special case in which domestic and foreign shocks are purely transitory.
|Date of creation:||Oct 1984|
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- Helpman, Elhanan, 1981.
"An Exploration in the Theory of Exchange-Rate Regimes,"
3445091, Harvard University Department of Economics.
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NBER Working Papers
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- Lucas, Robert E, Jr, 1980. "Methods and Problems in Business Cycle Theory," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 12(4), pages 696-715, November.
- Jeffrey D. Sachs, 1981. "The Current Account in the Eacroeconomic Adjustment Process," NBER Working Papers 0796, National Bureau of Economic Research, Inc.
- Rodriguez, Carlos Alfredo, 1980. "The Role of Trade Flows in Exchange Rate Determination: A Rational Expectations Approach," Journal of Political Economy, University of Chicago Press, vol. 88(6), pages 1148-1158, December.
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