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Current Account, Exchange Rate, and Monetary Dynamics in a Stochastic Equilibrium Model


  • Richard H. Clarida


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.

Suggested Citation

  • Richard H. Clarida, 1984. "Current Account, Exchange Rate, and Monetary Dynamics in a Stochastic Equilibrium Model," Cowles Foundation Discussion Papers 694, Cowles Foundation for Research in Economics, Yale University.
  • Handle: RePEc:cwl:cwldpp:694

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    References listed on IDEAS

    1. 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.
    2. 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.
    3. 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.
    4. Dornbusch, Rudiger & Fischer, Stanley, 1980. "Exchange Rates and the Current Account," American Economic Review, American Economic Association, vol. 70(5), pages 960-971, December.
    5. McCafferty, Stephen & Driskill, Robert, 1980. "Problems of Existence and Uniqueness in Nonlinear Rational Expectations Models," Econometrica, Econometric Society, vol. 48(5), pages 1313-1317, July.
    6. Helpman, Elhanan, 1981. "An Exploration in the Theory of Exchange-Rate Regimes," Journal of Political Economy, University of Chicago Press, vol. 89(5), pages 865-890, October.
    7. Anderson, Ronald W & Danthine, Jean-Pierre, 1981. "Cross Hedging," Journal of Political Economy, University of Chicago Press, vol. 89(6), pages 1182-1196, December.
    8. Mussa, Michael, 1982. "A Model of Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 90(1), pages 74-104, February.
    9. William H. Branson, 1981. "Macroeconomic Determinants of Real Exchange Rates," NBER Working Papers 0801, National Bureau of Economic Research, Inc.
    10. Jeffrey D. Sachs, 1981. "The Current Account in the Eacroeconomic Adjustment Process," NBER Working Papers 0796, National Bureau of Economic Research, Inc.
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    Current account; monetary shocks;


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