Open Economy Macro

Suman Basu · Emine Boz · Gita Gopinath · Francisco Roch · Filiz Unsal

Prepared as background for the IMF's Integrated Policy Framework, this paper builds a three-period small open economy in which monetary policy, capital inflow controls, sterilized foreign exchange …

Tobias Adrian · Christopher Erceg · Marcin Kolasa · Jesper Lindé · Pawel Zabczyk

A microfounded two-country New Keynesian model, calibrated separately to a representative emerging market and a representative advanced economy, in which limited FX-market risk-bearing capacity and an …

Tobias Adrian · Christopher Erceg · Jesper Lindé · Pawel Zabczyk · Jianping Zhou

An empirically-oriented New Keynesian small open economy model, of the kind central banks use, built to quantify when foreign exchange intervention and capital flow management tools improve monetary …

Robert A. Mundell

Mundell poses a deceptively simple question: if a currency area is defined as "a domain within which exchange rates are fixed," what is the right size for one? Starting from a stylized two-entity …

Charles Engel

This 1999 Journal of Political Economy paper (NBER Working Paper 5394, 1995) by Charles Engel asks how much of the historical variation in the U.S. real exchange rate against other high-income …

Elhanan Helpman

This 1981 Journal of Political Economy paper by Elhanan Helpman compares three exchange-rate regimes -- a float, a one-sided peg, and a cooperative peg -- in a two-country, perfect-foresight model …

Peter Blair Henry

The literature's standard finding -- that countries with open capital accounts do not grow faster -- tests a prediction the neoclassical growth model never makes, because in that model liberalization …

Maurice Obstfeld

This 1986 Journal of International Economics paper by Maurice Obstfeld re-examines the classic monetary-approach claim that devaluation under capital controls has no long-run real effects, by adding …

Kristin J. Forbes · Francis E. Warnock

Dating extreme capital-flow episodes from gross rather than net flows splits the picture in two -- "surges" and "stops" driven by foreign investors, "flight" and "retrenchment" driven by domestic …

Pierre-Olivier Gourinchas · Olivier Jeanne

The textbook neoclassical growth model says countries whose productivity is catching up should invest more and import more capital. Across 68 developing countries over 1980-2000 the cross-country …

R. A. Mundell

This 1963 Canadian Journal of Economics and Political Science paper by Robert Mundell asks what happens to monetary and fiscal policy's power over domestic income and employment once capital is …

Maurice Obstfeld · Kenneth Rogoff

The intertemporal approach treats the current account as the outcome of forward-looking saving and investment decisions rather than as a function of relative prices, and this chapter develops it from …

David K. Backus · Gregor W. Smith

Nontraded goods had been invoked to explain several international puzzles at once -- persistent deviations from purchasing power parity, low cross-country consumption correlations, and real interest …

A. Alesina · R. J. Barro

This 2002 Quarterly Journal of Economics paper by Alberto Alesina and Robert Barro builds a formal model of which countries should give up their own currency and adopt another country's, combining a …

Aart Kraay · Jaume Ventura

This 2000 Quarterly Journal of Economics paper by Aart Kraay and Jaume Ventura reexamines a classic question -- how does the current account respond to a transitory income shock? -- and overturns the …

Olivier J. Blanchard

This paper builds a tractable model of an economy populated by finitely lived agents -- each facing a constant instantaneous probability of death p, with new cohorts continuously born -- and uses it …

Cristina Arellano

In a small open economy where a risk-averse government borrows from risk-neutral lenders using only non-contingent one-period bonds, default happens in equilibrium and happens in *recessions* -- the …

Torsten Persson

Persson extends Diamond's (1965) overlapping-generations model of public debt to open economies, asking how a one-time, debt-financed tax cut to the currently young generation redistributes welfare …

Anusha Chari · Peter Blair Henry · Racha Moussa

In a calibrated neo-classical growth model, moving from financial autarky to integration raises consumption most in the first years after opening, so the standard infinite-horizon Hicksian welfare …

Philippe Bacchetta · Eric van Wincoop

This 2000 American Economic Review paper by Philippe Bacchetta and Eric van Wincoop builds a one-period, two-country monetary general-equilibrium model to ask whether exchange-rate stability really …

Hanno Lustig · Adrien Verdelhan

Even the most extreme departure from complete international asset markets -- one in which investors can hold nothing abroad but the foreign risk-free bond -- fails to match the smoothness of exchange …

J. Marcus Fleming

This 1962 IMF Staff Papers article by J. Marcus Fleming compares how effective monetary policy and budgetary (fiscal) policy are at stimulating domestic income and output under fixed versus floating …

Martin Feldstein · Charles Horioka

Across 16 industrial countries whose saving and investment rates are averaged over 1960-74, a one-percentage-point higher ratio of gross domestic saving to GDP comes with roughly nine-tenths of a …

Gita Gopinath · Emine Boz · Camila Casas · Federico J. Díez · Pierre-Olivier Gourinchas · Mikkel Plagborg-Møller

Because most trade is invoiced in a few dominant currencies rather than in the producer's or the destination's currency, it is the dollar exchange rate and not the bilateral one that drives import …

Richard A. Meese · Kenneth Rogoff

Across the dollar/mark, dollar/pound, dollar/yen and trade-weighted dollar rates over November 1976 to June 1981, no structural exchange rate model, univariate time series model, vector autoregression …

Maurice Obstfeld · Kenneth Rogoff

This 1995 Journal of Political Economy paper by Maurice Obstfeld and Kenneth Rogoff builds the foundational "Redux" two-country dynamic general-equilibrium model that bridges the intertemporal …

Elhanan Helpman · Assaf Razin

This 1987 American Economic Review paper by Elhanan Helpman and Assaf Razin shows that managing an exchange rate is never a purely monetary act: it is feasible only together with a monetary-fiscal …

Barbara Rossi

Asked whether anything forecasts exchange rates, this survey's answer is "it depends" -- on the predictor, the horizon, the sample, the model and the evaluation test. Predictability shows up most …

Rudiger Dornbusch

Motivated by the large, persistent real appreciation of the dollar between 1980 and 1985, this paper takes the nominal exchange rate movement as given (it does not explain it) and asks, in a …

Rudiger Dornbusch

This 1976 Journal of Political Economy paper by Rudiger Dornbusch builds a small open-economy model in which capital is perfectly mobile and asset markets clear instantly, but the price of domestic …

Philip R Lane · Jay C Shambaugh

This paper builds a database of international currency exposures for a large panel of countries over 1990-2004 and uses it to construct financially-weighted exchange rate indices, showing that …

Maurice Obstfeld · Alan M. Taylor

Global capital mobility traces a U over the past century and a half, and the authors argue the shape is explained by the open-economy policy trilemma rather than by technology: capital moved freely …

Pinelopi K. Goldberg · Michael M. Knetter

This 1997 Journal of Economic Literature survey by Pinelopi Goldberg and Michael Knetter synthesizes nearly 700 articles on the relationship between exchange rates and goods prices, organizing the …

David K. Backus · Patrick J. Kehoe · Finn E. Kydland

Backus, Kehoe, and Kydland build a two-country extension of Kydland and Prescott's (1982) closed-economy real-business-cycle model -- with complete international asset markets, country-specific …

Maurice Obstfeld

This 1983 Journal of International Money and Finance paper by Maurice Obstfeld (NBER Working Paper No. 1100) uses an infinite-horizon optimizing model of a small open economy to show that a temporary …

Vittorio Grilli · Nouriel Roubini

This 1992 Journal of International Economics paper by Vittorio Grilli and Nouriel Roubini builds a two-country extension of Lucas's (1988) cash-in-advance model of asset-market liquidity, in which …

Mirko Abbritti · Sebastian Weber

This paper develops a two-country currency union DSGE model with endogenous TFP growth and product and labor market frictions to assess how cross-country differences in market regulation affect …

Michael B. Devereux · Charles Engel

This 2003 Review of Economic Studies paper by Michael Devereux and Charles Engel builds a welfare-based, two-country stochastic sticky-price model -- extending Obstfeld and Rogoff (1995, 1998) -- to …

Fernando Alvarez · Andrew Atkeson

This 1997 Journal of Monetary Economics paper by Fernando Alvarez and Andrew Atkeson asks whether the segmented-markets model of money pioneered by Grossman and Weiss (1983) and Rotemberg (1984, 1985) …

Maurice Obstfeld · Kenneth Rogoff

This 2000 Journal of International Economics paper by Maurice Obstfeld and Kenneth Rogoff extends the "Redux" sticky-price approach to a genuinely stochastic setting with an exact closed-form solution …

David Romer

This 1993 Quarterly Journal of Economics paper by David Romer points out and empirically tests a previously unnoticed prediction of Kydland-Prescott-style models of monetary policy without …

Maurice Obstfeld

This 1986 American Economic Review paper by Maurice Obstfeld shows that speculative attacks on a fixed exchange rate do not have to be the inevitable, fully-anticipated consequence of unsustainable …

Torsten Persson

This 1984 Journal of Monetary Economics paper by Torsten Persson (circulated as IIES Seminar Paper No. 237, February 1983) asks whether the "monetary approach to the balance of payments" (MABOP) …

Yan Bai · Jing Zhang

A frictionless multi-country model implies no cross-country correlation between long-run savings and investment rates, so the Feldstein-Horioka finding really is a puzzle for it. Neither limited …

Richard Clarida · Jordi Gali

This 1994 Carnegie-Rochester Conference Series paper by Richard Clarida and Jordi Galí asks how much of the variance of real exchange rates since the collapse of Bretton Woods is attributable to …

Mark Aguiar · Manuel Amador

A Handbook survey that organises the economics of sovereign debt around a single benchmark limited-commitment model, then shows how each strand of the literature -- debt overhang, equilibrium default, …

Jeremy Bulow · Kenneth Rogoff

A sovereign that can still hold assets abroad after defaulting can always replace any reputation-based loan contract with a sequence of cash-in-advance insurance contracts collateralised out of the …

Enrique G. Mendoza

A standard small-open-economy business-cycle model, augmented with a collateral constraint that caps total debt -- including within-period working-capital loans -- at a fraction of the market value of …

Paul R. Krugman

Krugman presents a highly simplified continuous-time model of how an exchange rate behaves inside a credible target zone -- a band the authorities are committed to defend at its edges, but need not …

George S. Tavlas

This paper sets Milton Friedman's 1953 essay "The Case for Flexible Exchange Rates" side by side with Harry Johnson's near-identically titled 1969 essay, argument by argument, and concludes that …

Jeffrey D. Sachs

This paper builds a formal, continuous-time model of the current account with intertemporally optimizing households to make two linked points. First, a country's current account depends as much on …

Philip R. Lane · Gian Maria Milesi-Ferretti

Capital flows were tracked continuously, but the stocks of foreign assets and liabilities they accumulate into were largely unmeasured outside a handful of industrial countries. This paper builds …

Philip R. Lane

An interim survey of the dynamic general equilibrium open-economy literature that grew out of Obstfeld and Rogoff's 1995 Redux model, organised around the question of which of its assumptions its …

Kenneth Rogoff

This 1996 Journal of Economic Literature survey by Kenneth Rogoff states the purchasing power parity (PPP) puzzle as a reconciliation problem: the empirical literature finds that real exchange rates …

Maurice Obstfeld · Kenneth Rogoff

Six of international macroeconomics' most stubborn puzzles -- home bias in trade, Feldstein-Horioka, home bias in equity portfolios, low consumption correlations, the slow mean reversion of real …

Andrés Rodríguez-Clare · Mauricio Ulate · José P. Vásquez

Standard international trade models assume perfectly flexible prices and full employment. This paper introduces nominal rigidities (downward wage rigidity) into a quantitative trade model and asks how …