Open Economy Macroeconomics

by Asbjørn Rødseth

• ISBN13: 9780521788748
• ISBN10: 0521788749
• Format: Paperback
• Copyright: 2000-09-25
• Publisher: Cambridge University Press

Summary

Professor Ridseth provides a broad survey of open economy macroeconomics within a unified framework. This upper-level textbook reviews the theories employed by ministries of finance, central banks and financial institutions which form the basis for most quantitative models of open economies. It also points out the limitations of these theories and gives an update on recent research. The emphasis is on how the nature of the markets for foreign exchange and for exports and imports sets the stage for government policy and determines the macroeconomic effects of external and internal shocks. Particular attention is paid to the relations between short- and long-run equilibria and the long-run consequences of national policies. Short-run wage rigidities play a key role, and models with wage bargaining are compared to more traditional formulations. Exchange rate policy and the transmission of shocks are discussed both from a national and an international perspective.

Table of Contents

List of figures	viii
List of tables	x
Preface	xi
List of standard symbols	xii
Introduction	1	(1)
The Field	1	(1)
The book	2	(3)
The approach	5	(1)
Prerequisites	6	(3)
Part 1 Financial markets
The foreign exchange market	9	(31)
Some basic concepts	9	(3)
The balance sheet	12	(4)
The demand for currencies	16	(2)
A simple portfolio model	18	(6)
Capital mobility, interest rates and expectations	24	(8)
The current account and the government surplus	32	(3)
The forward market and covered interest rate parity	35	(5)
Portfolio choice, risk premia and capital mobility	40	(23)
Mean--variance analysis and the demand for foreign currency	40	(7)
The equilibrium risk premium	47	(3)
Further discussion of the mean-variance model and extensions	50	(6)
Expected utility maximization: an example	56	(3)
The degree of capital mobility between currencies	59	(4)
Money	63	(34)
A portfolio model with money	63	(15)
Money demand and currency substitution	78	(6)
Banks	84	(6)
Currency boards, target zones and the role of foreign exchange reserves	90	(7)
The monetary theory of the exchange rate	97	(16)
Exchange rate equilibrium with rational expectations	98	(4)
Temporary and permanent shocks, anticipations and news	102	(7)
The nominal anchor	109	(4)
Part 2 The open economy
The extremely open economy	113	(53)
Real interest rates	115	(1)
Income accounting	115	(2)
The specie--flow mechanism	117	(8)
Imperfect capital mobility: fixed exchange rate	125	(3)
Imperfect capital mobility: floating exchange rate	128	(6)
Government deficits	134	(4)
Wage rigidity	138	(7)
Real capital and investment	145	(3)
Unions and wage bargaining	148	(5)
Wealth dynamics in a growing economy	153	(7)
Some further questions	160	(6)
Home and foreign goods	166	(51)
The trade balance and the Marshall--Lerner condition	166	(3)
The Mundell--Fleming--Tobin model	169	(2)
Fixed exchange rate	171	(9)
Floating exchange rate	180	(5)
Some observations on real interest rates, expected inflation and the choice of deflator	185	(5)
From short- to long-run equilibrium: the price-specie-flow mechanism	190	(14)
Floating rate dynamics and overshooting	204	(7)
A more general dynamic model	211	(6)
Traded and non-traded goods	217	(43)
The basic static model	218	(11)
Alternatives and extensions	229	(11)
Wage dynamics	240	(5)
Capital stock dynamics	245	(5)
Real capital in both industries	250	(4)
The Scandinavian model of inflation	254	(6)
Alternative market structures, purchasing power parity and monopolistic competition	260	(27)
Purchaisng power parity, the law of one price and nominal rigidities	261	(5)
Monopolistic price-setting	266	(3)
Pricing to market	269	(4)
Customer markets, `beach-head' effects and multinational firms	273	(4)
Wage bargaining: the wedge	277	(10)
Part 3 Policy issues
International interactions	287	(36)
The international monetary system	287	(6)
The international transmission of shocks	293	(19)
Policy coordination	312	(4)
Monetary union and optimal currency areas	316	(7)
Appendix: deriving the properties of the aggregate demand functions	319	(4)
Exchange rate policy	323	(38)
Exchange rate versus price level targets and output stability	325	(11)
Credibility and speculative attacks	336	(11)
The benefits of having one's own currency	347	(6)
Appendixes
A Differential equations in two variables	353	(6)
B The homogeneous production function	359	(2)
Notes	361	(8)
Bibliography	369	(12)
Index	381