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

Jinill Kim, Yun Kwong KWOK*

*Corresponding author for this work

    Research output: Contribution to journalJournal articlepeer-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 languageEnglish
    Pages (from-to)371-380
    Number of pages10
    JournalComputational Economics
    Volume30
    Issue number4
    DOIs
    Publication statusPublished - 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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