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

Jinill Kim, Yun Kwong KWOK*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-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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