NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Exchange Rate Dynamics Redux

Maurice Obstfeld, Kenneth Rogoff

NBER Working Paper No. 4693 (Also Reprint No. r2037)
Issued in April 1994
NBER Program(s):   IFM

Until now, thinking on open economy macroeconomics has been largely schizophrenic. When it comes to analyzing exchange rate dynamics, an empirically-minded economist abandons modern current account models which, while theoretically coherent, fail to address the awkward reality of sticky nominal prices. In this paper we develop an analytically tractable two-country model that marries a full account of dynamics to a supply framework based on monopolistic competition and sticky prices. It offers simple and intuitive predictions about exchange rates and current accounts that sometimes differ sharply from those of either modern flexible-price intertemporal models, or traditional sticky-price Keynesian models. The model also leads to a novel perspective on the international welfare spillovers of monetary and fiscal policies.

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Document Object Identifier (DOI): 10.3386/w4693

Published: Journal of Political Economy 102 (June 1995), pp 624-660.

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