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

Jinill Kim; Yun Kwong Kwok

doi:10.1007/s10614-007-9098-y

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

Jinill Kim, Yun Kwong Kwok^*

^*Corresponding author for this work

Research output: Contribution to journal › Journal article › peer-review

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 language	English
Pages (from-to)	371-380
Number of pages	10
Journal	Computational Economics
Volume	30
Issue number	4
DOIs	https://doi.org/10.1007/s10614-007-9098-y
Publication status	Published - Nov 2007

Scopus Subject Areas

Economics, Econometrics and Finance (miscellaneous)
Computer Science Applications

User-Defined Keywords

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

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10.1007/s10614-007-9098-y

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title = "Higher-order properties of the 'exchange rate dynamics redux' model",

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.",

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AU - Kwok, Yun Kwong

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AB - 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.

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KW - New open economy macroeconomics

KW - Perturbation

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ER -

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

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