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.
Scopus Subject Areas
- Economics, Econometrics and Finance (miscellaneous)
- Computer Science Applications
- Net foreign assets
- New open economy macroeconomics
- Second-order solution
- Short-runand Long-run