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Open Economy Macroeconomics: New Directions

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  • Rudiger Dornbusch

Abstract

The paper reviews the directions of research that offer important insights into open economy macroeconomic policy: pricing, waiting and expectations. The pricing discussion centers on the recognition that firms are price setters. This implies that industry shocks such as exchange rate movements or changes in commercial policy have effects on output and prices different from the standard model of a small country under perfect competition. Industrial organization considerations including market structure and product differentiation determine the impact of shocks on output and prices. Extensions of work on irreversible investment, drawing on the option literature, shows the value of waiting. In open economy macroeconomics this theory can be applied not only to questions of employment but also to such topics as the return of capital flight. The expectations literature is being extended to more ambitious stochastic models of policy. If agents extrapolate current disturbances, say in money, and expect a cumulative deviation of money from and initial path there will be large immediate effects of money innovations on exchange rates. These new models extend the Mundell- Fleming models by showing that even small changes in the growth rate of money can bring about large changes, and volatility, in exchange rates.

Suggested Citation

  • Rudiger Dornbusch, 1987. "Open Economy Macroeconomics: New Directions," NBER Working Papers 2372, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:2372
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    References listed on IDEAS

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    1. Paul Krugman, 1986. "Pricing to Market when the Exchange Rate Changes," NBER Working Papers 1926, National Bureau of Economic Research, Inc.
    2. Pindyck, Robert S, 1988. "Irreversible Investment, Capacity Choice, and the Value of the Firm," American Economic Review, American Economic Association, vol. 78(5), pages 969-985, December.
    3. Dornbusch, Rudiger, 1987. "Exchange Rates and Prices," American Economic Review, American Economic Association, vol. 77(1), pages 93-106, March.
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    Cited by:

    1. Ansgar Belke & Dominik Kronen, 2017. "The impact of uncertainty on macro variables - An SVAR-based empirical analysis for EU countries," ROME Working Papers 201708, ROME Network.
    2. Ansgar Belke & Matthias Göcke, 2003. "Monetary Policy (In-) Effectiveness under Uncertainty - Some Normative Implications for European Monetary Policy," Diskussionspapiere aus dem Institut für Volkswirtschaftslehre der Universität Hohenheim 223/2003, Department of Economics, University of Hohenheim, Germany.
    3. Alex Izurieta, 2001. "Can Countries under A Common Currency Conduct Their Own Fiscal Policies?," Macroeconomics 0108008, University Library of Munich, Germany.
    4. Pindyck, Robert S, 1991. "Irreversibility, Uncertainty, and Investment," Journal of Economic Literature, American Economic Association, vol. 29(3), pages 1110-1148, September.
    5. Åkerholm, Johnny, 1988. "External adjustment in small open economies: Some recent experience," Bank of Finland Research Discussion Papers 6/1988, Bank of Finland.
    6. Ansgar Belke & Matthias Göcke, 2005. "Real Options Effects on Employment: Does Exchange Rate Uncertainty Matter for Aggregation?," German Economic Review, Verein für Socialpolitik, vol. 6(2), pages 185-203, May.
    7. Belke, Ansgar & Gocke, Matthias & Hebler, Martin, 2005. "Institutional uncertainty and European Social Union: Impacts on job creation and destruction in the CEECs," Journal of Policy Modeling, Elsevier, vol. 27(3), pages 345-354, April.
    8. Anubha Dhasmana, 2021. "Employment growth in the face of exchange rate uncertainty: The role of trade and foreign equity finance," Southern Economic Journal, John Wiley & Sons, vol. 88(1), pages 79-117, July.
    9. Kronen Dominik & Belke Ansgar, 2017. "The Impact of Policy Uncertainty on Macro Variables – An SVAR-Based Empirical Analysis for EU Countries," Review of Economics, De Gruyter, vol. 68(2), pages 93-116, August.
    10. Matthias Göcke & Ansgar Belke, 1999. "Micro and Macro Hysteresis in Employment under Exchange Rate Uncertainty," Computing in Economics and Finance 1999 722, Society for Computational Economics.
    11. Åkerholm, Johnny, 1988. "External adjustment in small open economies : Some recent experience," Research Discussion Papers 6/1988, Bank of Finland.
    12. Belke, Ansgar & Kotz, Hans-Helmut & Paul, Stephan & Schmidt, Christoph M. (ed.), 2009. "Wirtschaftspolitik im Zeichen europäischer Integration: Festschrift für Wim Kösters anlässlich seines 65. Geburtstages," RWI Schriften, RWI - Leibniz-Institut für Wirtschaftsforschung, volume 83, number 83.
    13. Ansgar Belke & Thomas Osowski, 2019. "International Effects Of Euro Area Versus U.S. Policy Uncertainty: A Favar Approach," Economic Inquiry, Western Economic Association International, vol. 57(1), pages 453-481, January.
    14. repec:zbw:bofrdp:1988_006 is not listed on IDEAS
    15. Ramos, Joseph, 1989. "Neo-Keynesian macroeconomics as seen from the South," Revista CEPAL, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL), August.

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