《EXCHANGE RATE DYNAMICS REDUX》.pdfVIP

NBER WORKING PAPER SERIES EXCHANGE RATE DYNAMICS REDUX Maurice Obstfeld Kenneth Rogoff Working Paper No. 4693 NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge, MA 02138 April 1994 The authors thank the National Science Foundation and the German Marshall Fund of the United States for support. This paper is a part of the NBERs research program in International Finance and Macroeconomics. Any opinions expressed are those of the authors and not those of the National Bureau of Economic Research. NBER Working Paper #4693 April 1994 EXCHANGE RATE DYNAMICS REDUX 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. Maurice Obstfeld