How Well Can the New Open Economy Macroeconomics Explain the Exchange Rate and Current Account?

Paul R. Bergin

NBER Working Paper No. 10356
Issued in March 2004
NBER Program(s):   IFM

This paper advances the new open economy macroeconomic (NOEM) literature in an empirical direction, estimating and testing a two-country model. Fit to U.S and G-7 data, the model performs moderately well for the exchange rate and current account. Results offer guidance for future theoretical work. Parameter estimates lend support to some common assumptions in the theoretical literature, such as local currency pricing and risk sharing. Estimates are found for key parameters commonly calibrated in the theoretical literature, such as the elasticity of substitution between home and foreign composite goods, and the response of a country risk premium to the net foreign asset position. Results also indicate that deviations from interest rate parity are not closely related to monetary policy shocks, as recently hypothesized. Further, results suggest that inserting explicit interest rate parity shocks into a NOEM model may be more helpful in explaining movements in the current account than the exchange rate.

download in pdf format
   (642 K)

email paper

This paper is available as PDF (642 K) or via email.

This paper was revised on March 10, 2006

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w10356

Published: Bergin, Paul R., 2006. "How well can the New Open Economy Macroeconomics explain the exchange rate and current account?," Journal of International Money and Finance, Elsevier, vol. 25(5), pages 675-701, August. citation courtesy of

Users who downloaded this paper also downloaded these:
Lubik and Schorfheide A Bayesian Look at the New Open Economy Macroeconomics
Obstfeld w9118 Exchange Rates and Adjustment: Perspectives from the New Open Economy Macroeconomics
Chinn and Moore w14175 Private Information and a Macro Model of Exchange Rates: Evidence from a Novel Data Set
Obstfeld w6319 Open-Economy Macroeconomics, Developments in Theory and Policy
Obstfeld and Rogoff w4693 Exchange Rate Dynamics Redux
NBER Videos

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email:

Contact Us