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Open-Economy Macroeconomics, Developments in Theory and Policy

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  • Maurice Obstfeld

Abstract

This paper surveys recent research in open-economy macroeconomics, using questions raised by European economic and monetary unification to guide the topics discussed. A striking empirical regularity is the tendency for changes in the nominal exchange rate regime systematically to affect the variability of nominal and real exchange rates alike. This regularity (which disappears in high-inflation conditions) can be explained by sticky-price theories or by models of asset-market liquidity effects. But plausible liquidity models have difficulty generating enough persistence (in output and real exchange rates, in particular) to match the data. So the macroeconomic costs of giving up the exchange-rate realignment option, emphasized in Mundell's optimum currency area concept, seem empirically relevant. The paper discusses other possible costs of currency unification, associated with a reduced number of asset markets. On the benefit side, our theories of the efficiencies due to a common currency remain unsatisfactory, despite recent advances. A key motivation for the choice of a common currency over a fixed exchange rate between national currencies is the fear of speculative attack. The paper concludes by showing how self-fulfilling currency crises can occur, and describes recent progress in narrowing the range of multiple equilibria in adjustable-peg regimes.

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  • Maurice Obstfeld, 1999. "Open-Economy Macroeconomics, Developments in Theory and Policy," NBER Working Papers 6319, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:6319
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    References listed on IDEAS

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    Cited by:

    1. Head, Allen & Shi, Shouyong, 2003. "A fundamental theory of exchange rates and direct currency trades," Journal of Monetary Economics, Elsevier, vol. 50(7), pages 1555-1591, October.
    2. Maurice Obstfeld, 2001. "International Macroeconomics: Beyond the Mundell-Fleming Model," NBER Working Papers 8369, National Bureau of Economic Research, Inc.
    3. Obstfeld, Maurice & Rogoff, Kenneth, 2000. "New directions for stochastic open economy models," Journal of International Economics, Elsevier, vol. 50(1), pages 117-153, February.
    4. Obstfeld, M., 1998. "Risk and Exchange Rate," Papers 193, Princeton, Woodrow Wilson School - Public and International Affairs.
    5. Qing Liu & Shouyong Shi, 2010. "Currency Areas And Monetary Coordination," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 51(3), pages 813-836, August.
    6. Christopher Kent & Rafic Naja, 1998. "Effective Real Exchange Rates and Irrelevant Nominal Exchange-rate Regimes," RBA Research Discussion Papers rdp9811, Reserve Bank of Australia.
    7. Michael B. Devereux & Charles Engel, 2003. "Monetary Policy in the Open Economy Revisited: Price Setting and Exchange-Rate Flexibility," Review of Economic Studies, Oxford University Press, vol. 70(4), pages 765-783.
    8. Obstfeld, Maurice & Taylor, Alan M., 1997. "Nonlinear Aspects of Goods-Market Arbitrage and Adjustment: Heckscher's Commodity Points Revisited," Journal of the Japanese and International Economies, Elsevier, vol. 11(4), pages 441-479, December.
    9. Frank Barry, 2001. "Openness, the Phillips Curve and the cost of relinquishing the currency," Working Papers 200105, School of Economics, University College Dublin.
    10. Benigno, Gianluca & Benigno, Pierpaolo, 2001. "Monetary Policy Rules and the Exchange Rate," CEPR Discussion Papers 2807, C.E.P.R. Discussion Papers.
    11. Jian Wang, 2004. "Which currency to set price? A model of multiple countries and risk averse firm," International Finance 0410004, EconWPA.
    12. Maurice Obstfeld and Giovanni Peri., 1998. "Regional Nonadjustment and Fiscal Policy: Lessons for EMU," Center for International and Development Economics Research (CIDER) Working Papers C98-096, University of California at Berkeley.
    13. Russell Cooper & Hubert Kempf, 1998. "Establishing a Monetary Union," NBER Working Papers 6791, National Bureau of Economic Research, Inc.
    14. Childs, Jason, 2009. "Rate of return parity and currency crises in experimental asset markets," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 19(1), pages 157-170, February.
    15. Fabio Ghironi & Alessandro Rebucci, 2000. "Monetary Rules for Emerging Market Economies," Boston College Working Papers in Economics 476, Boston College Department of Economics, revised 13 Aug 2001.
    16. Benigno, Gianluca & Benigno, Pierpaolo, 2008. "Exchange rate determination under interest rate rules," Journal of International Money and Finance, Elsevier, vol. 27(6), pages 971-993, October.
    17. Amil Dasgupta, 2000. "Social Learning with Payoff Complementarities," Econometric Society World Congress 2000 Contributed Papers 0322, Econometric Society.
    18. Chen, Shikuan, 2000. "Endogenous real exchange rate fluctuations in an optimizing open economy model," Journal of International Money and Finance, Elsevier, vol. 19(2), pages 185-205, April.
    19. Grade Grade, 1999. "The Political Economy of Exchange Rate Policies in Latin America and the Caribbean: The Case of Peru," Research Department Publications 3063, Inter-American Development Bank, Research Department.
    20. Sebastian Edwards, 1999. "Crisis Prevention: Lessons from Mexico and East Asia," NBER Working Papers 7233, National Bureau of Economic Research, Inc.
    21. Duarte, Margarida, 2003. "Why don't macroeconomic quantities respond to exchange rate variability?," Journal of Monetary Economics, Elsevier, vol. 50(4), pages 889-913, May.
    22. Devereux, Michael B & Engel, Charles M, 2000. "Monetary Policy In The Open Economy Revisited: Price Setting Rules And Exchange Rate Flexibility," CEPR Discussion Papers 2454, C.E.P.R. Discussion Papers.
    23. Sveinn Agnarsson & Axel Hall & Tryggvi Thor Herbertsson & Sigurður Ingólfsson & Gylfi Magnússon & Gylfi Zoega, 1999. "EMU and the Icelandic labour market," Economics wp03, Department of Economics, Central bank of Iceland.

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    JEL classification:

    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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