Working Paper: NBER ID: w9118
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: exchange rates; international adjustment; new open economy macroeconomics
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 models (F31) | perception of exchange rates' role in international adjustment (F31) |
| oversimplified modeling strategies (C51) | pessimism regarding exchange rates (F31) |
| misinterpretation of empirical data (C80) | pessimism regarding exchange rates (F31) |
| lack of international expenditure-switching effects in models (F41) | radical rethinking of exchange rates' role (F31) |