Higher-order properties of the 'exchange rate dynamics redux' model

Jinill Kim, Yun Kwong Kwok

Research output: Contribution to journalArticle

Abstract

In the 'exchange rate dynamics redux' model of Obstfeld and Rogoff (1995, Journal of Political Economy, 103 (3), 624-660), the short-run and the long-run changes in the net foreign asset are the same. This equivalence is consistent with the first-order linear approximation of the model; but is inconsistent with the long-run consumption smoothing behavior. This paper extends the 'redux' model by approximating the changes in the net foreign asset with the second-order perturbation method. This higher-order approximation illustrates that the equivalence does not hold and the difference between the short-run and the long-run changes is of the second order.

Original languageEnglish
Pages (from-to)371-380
Number of pages10
JournalComputational Economics
Volume30
Issue number4
DOIs
Publication statusPublished - 2007 Nov 1
Externally publishedYes

Fingerprint

Dynamic models
Exchange rate dynamics
Net foreign assets
Equivalence
Short-run
Approximation
Perturbation method
Consumption smoothing
Political economy

Keywords

  • Net foreign assets
  • New open economy macroeconomics
  • Perturbation
  • Second-order solution
  • Short-runand Long-run

ASJC Scopus subject areas

  • Economics, Econometrics and Finance (miscellaneous)

Cite this

Higher-order properties of the 'exchange rate dynamics redux' model. / Kim, Jinill; Kwok, Yun Kwong.

In: Computational Economics, Vol. 30, No. 4, 01.11.2007, p. 371-380.

Research output: Contribution to journalArticle

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