NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Open Economy Macroeconomics: New Directions

Rudiger Dornbusch

NBER Working Paper No. 2372
Issued in August 1987
NBER Program(s):   ITI   IFM

The paper reviews the directions of research that offer important insights into open economy macroeconomic policy: pricing, waiting and expectations. The pricing discussion centers on the recognition that firms are price setters. This implies that industry shocks such as exchange rate movements or changes in commercial policy have effects on output and prices different from the standard model of a small country under perfect competition. Industrial organization considerations including market structure and product differentiation determine the impact of shocks on output and prices. Extensions of work on irreversible investment, drawing on the option literature, shows the value of waiting. In open economy macroeconomics this theory can be applied not only to questions of employment but also to such topics as the return of capital flight. The expectations literature is being extended to more ambitious stochastic models of policy. If agents extrapolate current disturbances, say in money, and expect a cumulative deviation of money from and initial path there will be large immediate effects of money innovations on exchange rates. These new models extend the Mundell- Fleming models by showing that even small changes in the growth rate of money can bring about large changes, and volatility, in exchange rates.

download in pdf format
   (124 K)

download in djvu format
   (90 K)

email paper

This paper is available as PDF (124 K) or DjVu (90 K) (Download viewer) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w2372

Published: Misalignment of Exchange Rates, T.R. Marston (ed), University of Chicago Press, 1988.

Users who downloaded this paper also downloaded these:
Dornbusch and Fischer The Open Economy: Implications for Monetary and Fiscal Policy
Dornbusch w2775 Real Exchange Rates and Macroeconomics: A Selective Survey
Lubik and Schorfheide A Bayesian Look at the New Open Economy Macroeconomics
Obstfeld w8369 International Macroeconomics: Beyond the Mundell-Fleming Model
Dornbusch w1769 Exchange Rates and Prices
 
Publications
Activities
Meetings
Data
People
About

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

Contact Us