Open Economy Macroeconomics

Cover......Page 1
Half-title......Page 3
Open Economy Macroeconomics......Page 5
Copyright......Page 6
Contents......Page 7
Figures......Page 10
Tables......Page 12
Preface......Page 13
List of standard symbols......Page 14
I.1 The field......Page 17
I.2 The book......Page 18
I.3 The approach......Page 21
I.4 Prerequisites......Page 22
Part 1 - Financial markets......Page 23
1.1 Some basic concepts......Page 25
1.2 The balance sheet......Page 28
1.3 The demand for currencies......Page 31
Transaction costs and liquidity......Page 32
Exchange controls......Page 33
1.4 A simple portfolio model......Page 34
1.5 Capital mobility, interest rates and expectations......Page 40
Floating exchange rates......Page 41
Fixed exchange rates......Page 44
1.6 The current account and the government surplus......Page 48
1.7 The forward market and covered interest rate parity......Page 51
Exercises......Page 54
2.1 Mean–variance analysis and the demand for foreign currency......Page 56
The minimum-variance portfolio......Page 58
The speculative portfolio......Page 59
Generalization to several currencies......Page 60
Empirical applications......Page 61
2.2 The equilibrium risk premium......Page 63
Relation to expected utility maximization......Page 66
Real capital and negative financial wealth......Page 67
Firms' demand for foreign currency......Page 68
The investment horizon......Page 69
More accurate approximation of the risk premium......Page 70
Siegel's paradox......Page 71
2.4 Expected utility maximization: an example......Page 72
2.5 The degree of capital mobility between currencies......Page 75
Exercises......Page 78
3.1 A portfolio model with money......Page 79
Solving the model......Page 83
Monetary policy with a floating exchange rate: sterilized and unsterilized interventions......Page 89
The effects of exogenous shocks: two examples......Page 90
Some final remarks......Page 92
3.2 Money demand and currency substitution......Page 94
Currency substitution......Page 96
Which currency to use?......Page 98
Other views on currency substitution......Page 99
3.3 Banks......Page 100
The role of foreign exchange reserves......Page 106
Currency boards......Page 107
Target zones......Page 108
Exercises......Page 111
4 The monetary theory of the exchange rate......Page 113
4.1 Exchange rate equilibrium with rational expectations......Page 114
4.2 Temporary and permanent shocks, anticipations and news......Page 118
Temporary and permanent changes......Page 120
Anticipated and unanticipated events......Page 122
Empirical results......Page 124
4.3 The nominal anchor......Page 125
Exercises......Page 126
Part 2 - The open economy......Page 127
5 The extremely open economy......Page 129
5.2 Income accounting......Page 131
5.3 The specie–flow mechanism......Page 133
A one-time devaluation......Page 137
Continuous devaluation......Page 139
Consumption smoothing......Page 140
5.4 Imperfect capital mobility: fixed exchange rate......Page 141
5.5 Imperfect capital mobility: floating exchange rate......Page 144
5.6 Government deficits......Page 150
5.7 Wage rigidity......Page 154
Fixed exchange rate......Page 155
Floating exchange rate......Page 157
5.8 Real capital and investment......Page 161
5.9 Unions and wage bargaining......Page 164
Requirements for balanced growth......Page 169
Stability of the private wealth ratio......Page 170
Stability of the government wealth ratio......Page 171
Government borrowing constraints......Page 173
The relation to utility maximization......Page 176
Redistribution within the private sector......Page 177
Are one-time devaluations and monetary expansions credible?......Page 178
Are savings and investment independent? The Feldstein–Horioka puzzle......Page 179
Exercises......Page 181
6.1 The trade balance and the Marshall–Lerner condition......Page 182
6.2 The Mundell–Fleming–Tobin model......Page 185
6.3 Fixed exchange rate......Page 187
Fiscal policy......Page 189
Monetary policy......Page 190
Shock absorption and stabilization......Page 191
The impact of the degree of capital mobility......Page 192
Devaluation......Page 193
6.4 Floating exchange rate......Page 196
Fiscal policy......Page 197
The effect of capital mobility......Page 198
Further comparisons with fixed rates......Page 199
6.5 Some observations on real interest rates, expected inflation and the choice of deflator......Page 201
The choice of deflator......Page 202
Endogenous inflation expectations: the Walters effect......Page 204
6.6 From short- to long-run equilibrium: the price–specie–flow mechanism......Page 206
Interpreting the Phillips curve......Page 207
The temporary equilibrium......Page 208
The stationary equilibrium......Page 209
Stability conditions......Page 210
Dynamics: the standard case......Page 213
An expansionary shock to domestic demand......Page 215
A devaluation......Page 217
6.7 Floating rate dynamics and overshooting......Page 220
Solving the model......Page 221
A monetary expansion......Page 224
A shock to the trade balance......Page 225
6.8 A more general dynamic model......Page 227
Exercises......Page 230
7 Traded and non-traded goods......Page 233
7.1 The basic static model......Page 234
Solving the model......Page 236
Devaluation......Page 239
Effects of other exogenous variables......Page 241
The current account and savings......Page 244
Real wage rigidity......Page 245
Income distribution effects......Page 247
VAT and payroll taxes: 'internal devaluations'......Page 249
Government employment......Page 252
Exports, imports and changes in terms of trade......Page 254
Imported inputs......Page 255
7.3 Wage dynamics......Page 256
The wage curve and bargaining......Page 259
7.4 Capital stock dynamics......Page 261
7.5 Real capital in both industries......Page 266
Stationary states......Page 267
The momentary equilibrium......Page 268
7.6 The Scandinavian model of inflation......Page 270
Exercises......Page 273
8 Alternative market structures, purchasing power parity and monopolistic competition......Page 276
8.1 Purchasing power parity, the law of one price and nominal rigidities......Page 277
8.2 Monopolistic price-setting......Page 282
8.3 Pricing to market......Page 285
8.4 Customer markets, 'beach-head' effects and multinational firms......Page 289
Customer markets......Page 290
'Beach-head' effects......Page 291
8.5 Wage bargaining: the wedge......Page 293
Part 3 - Policy issues......Page 301
9.1 The international monetary system......Page 303
Case A: fixed interest rates, fixed exchange rate......Page 309
A more general framework......Page 313
Case B: Fixed money supplies, fixed exchange rate......Page 316
Case C: Flexible exchange rate, fixed money supplies......Page 317
Case D: Country a fixes the exchange rate to b......Page 318
Shocks from other sources......Page 320
Conclusions and some further points......Page 322
Transmission and shock absorption in practice......Page 325
9.3 Policy coordination......Page 328
9.4 Monetary union and optimal currency areas......Page 332
Optimal currency areas......Page 333
9A.2 Case C: Flexible exchange rates......Page 335
9A.3 Case D: fixed exchange rates, b centre, a periphery......Page 336
Exercises......Page 337
10 Exchange rate policy......Page 339
The model......Page 341
Solution......Page 343
The effects of shocks......Page 344
Supply shocks......Page 345
Exchange rate volatility......Page 346
Some conclusions......Page 347
Some output variability may be desirable......Page 348
Some further remarks......Page 349
The credibility problem......Page 352
Why fixed exchange rates collapse: Obstfeld's model......Page 355
General discussion......Page 361
10.3 The benefits of having one's own currency......Page 363
Exercises......Page 368
Homogeneous linear systems......Page 369
APPENDIX B - The homogeneous production function......Page 375
Notes......Page 377
Bibliography......Page 385
Index......Page 397