Working Paper: CEPR ID: DP3533
Authors: Maurice Obstfeld
Abstract: The New Open Economy Macroeconomics has allowed economists to tackle classical problems with new tools, while also generating new ideas and questions. In their attempts to make the new models capture empirical regularities, researchers have entertained a variety of assumptions about the international pricing of goods, notably, models of pricing to market and destination-currency pricing of exports. Some of the resulting models imply that exchange-rate changes lack international expenditure-switching effects, and they thus appear to call for a radical rethinking of the role of exchange rates in international adjustment. This Paper argues that the recent resurgence of exchange-rate pessimism stems from oversimplified modeling strategies rather than from evidence. Like earlier episodes starting with the extreme ?elasticity pessimism? of the early postwar era, it is based on a misinterpretation of the empirical record.
Keywords: elasticity; pessimism; exchange rate policy; expenditure-switching effects; international adjustment; international competitiveness
JEL Codes: F31; F32; F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| exchange rate changes (F31) | export pricing strategies (L11) |
| export pricing strategies (L11) | trade balances (F10) |
| trade balances (F10) | competitiveness in international markets (F23) |
| exchange rate changes (F31) | competitiveness in international markets (F23) |