The Capitalization of Income Streams and the Effects of Open Market Policy under Fixed Exchange Rates
This paper investigates the long- and short-run neutrality of open-market monetary policy in a world of fixed exchange rates and imperfect substitutability between bonds denominated in different currencies. Using an illustrative portfolio-balance model, it shows that when the public discounts the future tax liabilities associated with the national debt and the central bank supports the exchange rate by trading non-interest-bearing foreign assets, open-market policy has a short-run effect, but no long-run effect, on the domestic price level and interest rate. When the foreign-exchange intervention assets earn interest that is rebated to and capitalized by the public, open-market policy loses even its short-run efficacy -- the capital-account offset to monetary policy is complete.
|Date of creation:||Aug 1980|
|Publication status:||published as Obstfeld, Maurice. "The Capitalization of Income Streams and the Effects of Open Market Policy under Fixed Exchange Rates." Journal of Monetary Economics. Vol. 9, No. 1, (January 1982), pp. 87- 98.|
|Contact details of provider:|| Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.|
Web page: http://www.nber.org
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- 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.
- Boyer, Russel S., 1979. "Sterilization and the monetary approach to balance of payments analysis," Journal of Monetary Economics, Elsevier, vol. 5(2), pages 295-300, April.
- Frenkel, Jacob A & Rodriguez, Carlos Alfredo, 1975. "Portfolio Equilibrium and the Balance of Payments: A Monetary Approach," American Economic Review, American Economic Association, vol. 65(4), pages 674-688, September.
- Obstfeld, Maurice, 1980.
"Imperfect asset substitutability and monetary policy under fixed exchange rates,"
Journal of International Economics,
Elsevier, vol. 10(2), pages 177-200, May.
- Maurice Obstfeld, 1980. "Imperfect Asset Substitutability and Monetary Policy under Fixed Exchange Rates," NBER Working Papers 0485, National Bureau of Economic Research, Inc.
- 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..
- Girton, Lance & Henderson, Dale W., 1976. "Financial capital movements and central bank behavior in a two-country, short-run portfolio balance model," Journal of Monetary Economics, Elsevier, vol. 2(1), pages 33-61, January.
- Russell S. Boyer, 1975. "Commodity Markets and Bond Markets in a Small, Fixed-Exchange-Rate Economy," Canadian Journal of Economics, Canadian Economics Association, vol. 8(1), pages 123-123, February.
- 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.
- Robert A. Mundell, 1960. "The Public Debt, Corporate Income Taxes, and the Rate of Interest," Journal of Political Economy, University of Chicago Press, vol. 68, pages 622-622.
When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:0528. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If references are entirely missing, you can add them using this form.