NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

The Capitalization of Income Streams and the Effects of Open Market Policy under Fixed Exchange Rates

Maurice Obstfeld

NBER Working Paper No. 528 (Also Reprint No. r0266)
Issued in August 1980
NBER Program(s):   ITI   IFM

This paper investigates the long- and short-run neutrality of open-market monetary policy in a world of fixed exchange rates and imperfect substitutability between bonds denominated in different currencies. Using an illustrative portfolio-balance model, it shows that when the public discounts the future tax liabilities associated with the national debt and the central bank supports the exchange rate by trading non-interest-bearing foreign assets, open-market policy has a short-run effect, but no long-run effect, on the domestic price level and interest rate. When the foreign-exchange intervention assets earn interest that is rebated to and capitalized by the public, open-market policy loses even its short-run efficacy -- the capital-account offset to monetary policy is complete.

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Document Object Identifier (DOI): 10.3386/w0528

Published: Obstfeld, Maurice. "The Capitalization of Income Streams and the Effects of Open Market Policy under Fixed Exchange Rates." Journal of Monetary Economics. Vol. 9, No. 1, (January 1982), pp. 87- 98.

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