Working Paper: NBER ID: w0557
Authors: 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.
Keywords: exchange rate policies; rational expectations; capital mobility
JEL Codes: F31; F33
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| unanticipated discrete devaluation of the currency (F31) | no real effects (Y70) |
| unanticipated discrete devaluation of the currency (F31) | transfer of interest-bearing foreign assets from the public to the central bank (F32) |
| unanticipated permanent increase in the rate of devaluation (F31) | significant fall in consumption (E20) |
| unanticipated permanent increase in the rate of devaluation (F31) | current account surplus (F32) |
| unanticipated permanent increase in the rate of devaluation (F31) | long-run decline in central bank reserves (E58) |
| increase in the rate of devaluation (F31) | decline in real money demand (E41) |
| increase in the rate of devaluation (F31) | changes in expected future transfer payments (H69) |
| increase in the rate of devaluation (F31) | perceived wealth (E21) |
| increase in the rate of devaluation (F31) | negative impact on welfare (I30) |