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Imperfect Asset Substitutability and Monetary Policy under Fixed Exchange Rates

Listed author(s):
  • Maurice Obstfeld

This paper presents a long-run model of the open economy in a world of fixed exchange rates and imperfect substitutability between bonds denominated in different currencies. The model explicitly accounts for the wealth flow accompanying current-account imbalance and for the flow of interest payments associated with international lending. Both the dynamic and steady-state implications of the model are quite different from those of models that specify the capital account as a continuing flow responding to the level of interest rates. In particular, we find that when there exists outside government debt, open-market policy is not in general neutral in the long run. We also find conditions under which the central bank is able to hold the domestic price level constant in the face of an inflationary disturbance from abroad without exhausting, in the long run, its stock of domestic assets.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 0485.

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Date of creation: Jun 1980
Publication status: published as Obstfeld, Maurice. "Imperfect Asset Substitutability and Monetary Policy under Fixed Exchange Rates." Journal of International Economics, Vol. 10, No. 2, (May 1980), pp. 177-200.
Handle: RePEc:nbr:nberwo:0485
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  1. Barro, Robert J, 1974. "Are Government Bonds Net Wealth?," Journal of Political Economy, University of Chicago Press, vol. 82(6), pages 1095-1117, Nov.-Dec..
  2. Johnson, Harry G, 1974. "Major Issues in Monetary Economics," Oxford Economic Papers, Oxford University Press, vol. 26(2), pages 212-225, July.
  3. Robert A. Mundell, 1962. "The Appropriate Use of Monetary and Fiscal Policy for Internal and External Stability," IMF Staff Papers, Palgrave Macmillan, vol. 9(1), pages 70-79, March.
  4. Kouri, Pentti J K & Porter, Michael G, 1974. "International Capital Flows and Portfolio Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 82(3), pages 443-467, May/June.
  5. Thomas D. Willett & Francesco Forte, 1969. "Interest Rate Policy and External Balance," The Quarterly Journal of Economics, Oxford University Press, vol. 83(2), pages 242-262.
  6. S. C. Tsiang, 1975. "The Dynamics of International Capital Flows and Internal and External Balance," The Quarterly Journal of Economics, Oxford University Press, vol. 89(2), pages 195-214.
  7. Swoboda, Alexander K, 1973. "Monetary Policy under Fixed Exchange Rates: Effectiveness, the Speed of Adjustment and Proper Use," Economica, London School of Economics and Political Science, vol. 40(158), pages 136-154, May.
  8. Levin, Jay H, 1972. "International Capital Mobility and the Assignment Problem," Oxford Economic Papers, Oxford University Press, vol. 24(1), pages 54-67, March.
  9. Robert P. Flood, 1977. "Growth, Prices, and the Balance of Payments," Canadian Journal of Economics, Canadian Economics Association, vol. 10(2), pages 193-207, May.
  10. Obstfeld, Maurice, 1982. "The capitalization of income streams and the effects of open-market policy under fixed exchange rates," Journal of Monetary Economics, Elsevier, vol. 9(1), pages 87-98.
  11. Henderson, Dale W, 1977. "Modeling the Interdependence of National Money and Capital Markets," American Economic Review, American Economic Association, vol. 67(1), pages 190-199, February.
  12. Fratianni, Michele, 1976. "On the effectiveness of monetary policy under fixed rates of exchange," Journal of Monetary Economics, Elsevier, vol. 2(1), pages 63-79, January.
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