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Macroeconomic Policy, Exchange-Rate Dynamics, and Optimal Asset Accumulation

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  • Maurice Obstfeld

Abstract

The paper develops a model of exchange-rate and current-account determination for a small economy peopled by infinitely lived, utility-maximizing households. In this setting, a central-bank purchase of foreign exchange has no real effects when central-bank foreign reserves earn interest at the world rate and the proceeds are returned to the public. In contrast, an increase in the monetary growth rate does have real effects, even in the long run. The model developed here implies that an increase in government spending may lead to a surplus on current account. The external adjustment process predicted by the model is one in which consumption, real balances, anti external assets all rise or fall simultaneously.

Suggested Citation

  • Maurice Obstfeld, 1980. "Macroeconomic Policy, Exchange-Rate Dynamics, and Optimal Asset Accumulation," NBER Working Papers 0599, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:0599
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    References listed on IDEAS

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    1. repec:bla:scandj:v:78:y:1976:i:2:p:280-304 is not listed on IDEAS
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    8. Stockman, Alan C, 1980. "A Theory of Exchange Rate Determination," Journal of Political Economy, University of Chicago Press, vol. 88(4), pages 673-698, August.
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