NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

The Balance of Payments Adjustment Mechanism in a Rational Expectations Equilibrium

Richard H. Clarida

NBER Working Paper No. 1945
Issued in June 1986
NBER Program(s):   ITI   IFM

This paper provides a choice theoretic, general equilibrium

account of the balance of payments adjustment process and the determination

of national price levels in a world comprised of countries populated by

rational households. Balance of payments adjustment dynaniics arise in the

equilibrium of this model from the precautionary saving behavior of risk-

averse households who self-insure against random productivity fluctuations

by accumulating, via balance of payments surpluses in productive

periods, buffer stocks of domestic money which can be drawn down to finance

payments deficits, and thus a less variable profile of consumption relative to output, when productivity is unexpectedly low. Precautionary saving is shown to exhibit the

partial-adjustment-to-target behavior typically postulated in the monetary approach literature. The existence of a rational expectations equilibrium in which the distribution of international reserves among central banks is stationary is established.

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Document Object Identifier (DOI): 10.3386/w1945

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