Working Paper: NBER ID: w1945
Authors: Richard H. Clarida
Abstract: This paper provides a choice theoretic, general equilibrium \naccount of the balance of payments adjustment process and the determination \nof national price levels in a world comprised of countries populated by \nrational households. Balance of payments adjustment dynaniics arise in the \nequilibrium of this model from the precautionary saving behavior of risk- \naverse households who self-insure against random productivity fluctuations \nby accumulating, via balance of payments surpluses in productive \nperiods, buffer stocks of domestic money which can be drawn down to finance \npayments deficits, and thus a less variable profile of consumption relative to output, when productivity is unexpectedly low. Precautionary saving is shown to exhibit the \npartial-adjustment-to-target behavior typically postulated in the monetary approach literature. The existence of a rational expectations equilibrium in which the distribution of international reserves among central banks is stationary is established.
Keywords: Balance of Payments; Rational Expectations; Precautionary Saving; General Equilibrium
JEL Codes: F31; F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| productivity shocks (O49) | changes in real expenditure and savings (E21) |
| precautionary saving behavior (D14) | accumulation of buffer stocks of domestic money (E51) |
| accumulation of buffer stocks of domestic money (E51) | smoothing consumption relative to output (D15) |
| precautionary saving behavior (D14) | balance of payments adjustment dynamics (F32) |
| self-insurance mechanisms (G52) | persistence in balance of payments imbalances (F32) |
| distribution of international reserves (F30) | national price levels (E30) |