TY - JOUR
AU - Obstfeld,Maurice
TI - Exchange-Rate Dynamics and Optimal Asset Accumulation Revisited
JF - National Bureau of Economic Research Technical Working Paper Series
VL - No. 64
PY - 1988
Y2 - February 1988
DO - 10.3386/t0064
UR - http://www.nber.org/papers/t0064
L1 - http://www.nber.org/papers/t0064.pdf
N1 - Author contact info:
Maurice Obstfeld
Department of Economics
University of California, Berkeley
530 Evans Hall #3880
Berkeley, CA 94720-3880
Tel: 510/643-9646
Fax: 510/642-6615
E-Mail: obstfeld@econ.berkeley.edu
AB - It has recently been observed that when equations of motion for state variables are nonautonomous, optimal control problems involving Uzawa's endogenous rate of time preference cannot be solved using the change-of-variables method common in the literature. Instead, the problem must be solved by explicitly adding an additional state variable that measures the motion of time preference over time. This note reassesses earlier work of my own on exchange rate dynamics, which was based on a change-of- variables solution procedure. When the correct two-state-variable solution procedure is used, the model's qualitative predictions are unchanged. In addition, the analysis yields an intuitive interpretation of the extra co-state variable that arises in solving the individual's maximization problem.
ER -