Working Paper: NBER ID: w4693
Authors: Maurice Obstfeld; Kenneth Rogoff
Abstract: Until now, thinking on open economy macroeconomics has been largely schizophrenic. When it comes to analyzing exchange rate dynamics, an empirically-minded economist abandons modern current account models which, while theoretically coherent, fail to address the awkward reality of sticky nominal prices. In this paper we develop an analytically tractable two-country model that marries a full account of dynamics to a supply framework based on monopolistic competition and sticky prices. It offers simple and intuitive predictions about exchange rates and current accounts that sometimes differ sharply from those of either modern flexible-price intertemporal models, or traditional sticky-price Keynesian models. The model also leads to a novel perspective on the international welfare spillovers of monetary and fiscal policies.
Keywords: exchange rates; international finance; sticky prices; monopolistic competition
JEL Codes: F31; F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Monetary shocks (E39) | Consumption (E21) |
| Monetary shocks (E39) | Output (Y10) |
| Monetary shocks (E39) | Terms of trade (F14) |
| Monetary policy (E52) | Current account imbalances (F32) |
| Domestic government spending (H56) | Home current account surplus (F32) |
| Domestic government spending (H56) | World real interest rate (E43) |
| Fiscal innovations (E62) | Nominal exchange rates (F31) |
| Government demand (H59) | Output (Y10) |
| Government demand (H59) | Saving (E21) |