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Capital Mobility and Devaluation in an Optimizing Model with Rational Expectations

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  • Maurice Obstfeld

Abstract

This paper examines the effects of ex-change-rate policies when individuals maximize lifetime utility on the basis of rational expectations about the future. The economy studied is one in which the authorities allow free mobility of capital under a crawling-peg exchange-rate regime. Many industrializing economies have adopted a crawling peg as a means of reconciling disparate inflation rates at home and abroad, and some recent efforts to use the rate of crawl as an instrument of anti-inflation policy have attracted considerable interest (see Carlos Diaz Alejandro). Tools similar to those employed here have been applied by Guillermo Calvo (forthcoming) to study this type of exchange-rate management under conditions of capital immobility.

Suggested Citation

  • Maurice Obstfeld, 1980. "Capital Mobility and Devaluation in an Optimizing Model with Rational Expectations," NBER Working Papers 0557, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:0557
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    1. Dornbusch, Rudi, 1996. "The Effectiveness of Exchange-Rate Changes," Oxford Review of Economic Policy, Oxford University Press, vol. 12(3), pages 26-38, Autumn.
    2. 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.
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    1. Maurice Obstfeld, 1986. "Capital Flows, the Current Account, and the Real Exchange Rate: Some Consequences of Stabilization and Liberalization," NBER Chapters, in: Economic Adjustment and Exchange Rates in Developing Countries, pages 201-232, National Bureau of Economic Research, Inc.
    2. Obstfeld, Maurice, 1986. "Capital controls, the dual exchange rate, and devaluation," Journal of International Economics, Elsevier, vol. 20(1-2), pages 1-20, February.
    3. Maurice Obstfeld, 1988. "Exchange-Rate Dynamics and Optimal Asset Accumulation Revisited," NBER Technical Working Papers 0064, National Bureau of Economic Research, Inc.
    4. Robert Kollmann, 2015. "Risk sharing in a world economy with uncertainty shocks," Globalization Institute Working Papers 258, Federal Reserve Bank of Dallas.
    5. Sweder van Wijnbergen, 1986. "Exchange Rate Management and Stabilization Policies in Developing Countries," NBER Chapters, in: Economic Adjustment and Exchange Rates in Developing Countries, pages 17-42, National Bureau of Economic Research, Inc.
    6. Ghironi, Fabio, 2008. "The role of net foreign assets in a New Keynesian small open economy model," Journal of Economic Dynamics and Control, Elsevier, vol. 32(6), pages 1780-1811, June.
    7. Assibey-Yeboah, Mark & Mohsin, Mohammed, 2014. "The real effects of inflation in a developing economy with external debt and sovereign risk," The North American Journal of Economics and Finance, Elsevier, vol. 30(C), pages 40-55.
    8. Francis, J. & Kompas, T., 1998. "Uzawa's Transformation and Optimal Control Problems With Variable Rates of Time Preference," Papers 354, Australian National University - Department of Economics.
    9. Aoki, Yoshimasa & Tomoda, Yasunobu, 2009. "Optimal money supply in models with endogenous discount factor," The Quarterly Review of Economics and Finance, Elsevier, vol. 49(3), pages 798-810, August.
    10. MacKinnon, James G & Haug, Alfred A & Michelis, Leo, 1999. "Numerical Distribution Functions of Likelihood Ratio Tests for Cointegration," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 14(5), pages 563-577, Sept.-Oct.
    11. Robert Kollmann, 2016. "Risk Sharing, the Exchange Rate and Net Foreign Assets in a World Economy with Uncertainty Shocks," 2016 Meeting Papers 721, Society for Economic Dynamics.
    12. Mansoorian Arman & Neaime Simon, 2002. "Habits And Durability In Consumption And The Effects Of Exchange Rate Policies," International Economic Journal, Taylor & Francis Journals, vol. 16(2), pages 97-114.
    13. Tom Kompas & Omar Abdel-Razeq, 2001. "A Simple Monetary Growth Model with Variable Rates of Time Preference," International and Development Economics Working Papers idec01-10, International and Development Economics.
    14. Arman Mansoorian, 1999. "On Cash in Advance Constraints for Open Economies," Working Papers 1999_02, York University, Department of Economics.
    15. Ghironi, Fabio, 2006. "Macroeconomic interdependence under incomplete markets," Journal of International Economics, Elsevier, vol. 70(2), pages 428-450, December.
    16. Mansoorian, Arman & Mohsin, Mohammed, 2013. "Real asset returns, inflation and activity in a small, open, Cash-in-Advance economy," Journal of International Money and Finance, Elsevier, vol. 32(C), pages 234-250.
    17. Rodríguez-Arana, Alejandro, 2016. "Una visión crítica del problema de indeterminación de la distribución del ingreso en el sistema económico de piero Sraffa./ A critical view of the problem indeterminacy of distributionincome in the sy," Panorama Económico, Escuela Superior de Economía, Instituto Politécnico Nacional, vol. 12(23), pages 7-28, Segundo s.
    18. Mohsin, Mohammed, 2004. "Exchange rate policies and endogenous time preference: a dynamic analysis of a small open economy," Economics Letters, Elsevier, vol. 82(2), pages 195-203, February.
    19. Mansoorian, Arman & Mohsin, Mohammed, 2006. "On the employment, investment and current account effects of inflation," Journal of International Economics, Elsevier, vol. 70(1), pages 296-313, September.
    20. Arman Mansoorian & Mohammed Mohsin, 2002. "The Employment, Investment and Current Account Effects of Exchange Rate Policies in a Cash-in-Advance Economy," Working Papers 2002_04, York University, Department of Economics.
    21. Dudley, L., 1980. "Macroeconomic Interdependence and the Terms of Trade," Cahiers de recherche 8014, Universite de Montreal, Departement de sciences economiques.
    22. Sushanta K. Mallick & Mohammed Mohsin, 2007. "Monetary policy in high inflation open economies: evidence from Israel and Turkey," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 12(4), pages 405-415.
    23. Mansoorian, Arman & Michelis, Leo, 2010. "Monetary policy in a small open economy with durable goods and differing cash-in-advance constraints," Economics Letters, Elsevier, vol. 107(2), pages 246-248, May.
    24. AKITOBY, Bernardin, 1997. "Termes de l'échange endogènes et cycles économiques réels : une application à la Côte-d'Ivoire," Cahiers de recherche 9701, Universite de Montreal, Departement de sciences economiques.
    25. Mansoorian, Arman & Neaime, Simon, 2003. "Durable goods, habits, time preference, and exchange rates," The North American Journal of Economics and Finance, Elsevier, vol. 14(1), pages 115-130, March.

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