expectations the exchange rate and the current account abstract a critical examination is undertaken of the relationship between the exchange rate and the current account in a small open economy theoretically the correlation between the exchange rate and the current account seems to be ambiguous in particular the association between movements in the exchange rate and the current account is likely to depend in an essential manner on the nature of exogenous disturbances affecting the two variables simultaneously lastly the question of the role of an optimal monetary policy and the choice of an exchange rate regime in an uncertain environment is raised

habits costly investment and current account dynamics abstract we analyze the current account dynamics for a small country model with habit forming consumers and costly investment the model has several empirical and policy implications i it is consistent with stylized facts regarding the effects of productivity shocks and increases in fiscal spending and regarding the savings investment co movement ii the long run effect of a temporary shock on net foreign assets is often opposite to that of a permanent shock iii under strong habit persistence the welfare dynamics are sluggish so that a beneficial tax financed fiscal policy may have a harmful hangover effect on welfare

the role of net foreign assets in a new keynesian small open economy model abstract this paper develops a small open economy sticky price model that determines a unique stable long run asset position for households as function of their incentive to anticipate or postpone consumption and labor effort across periods this is accomplished by adopting an overlapping generations structure in which new households with no assets enter the economy in each period the same characteristics of household behavior that determine long run assets are also important determinants of the model s responses to shocks stabilizing producer prices results in a milder recession following a drop in world demand than stabilizing consumer prices because it prevents the markup in the pricing of goods from increasing in addition given an initial foreign debt allowing consumer prices to rise causes a decrease in the ex post real interest rate on impact lowering the interest burden of the initial debt the differences across policy rules generated by the initial asset position are robust to changes in the latter as long as these are brought about by changes in parameter values that do not alter the fundamental characteristics of household and firm behavior that are also the key determinants of long run assets

financial integration and business cycles in a small open economy abstract the purpose of this study is to examine a dynamic stochastic general equilibrium framework with financial and informational frictions and foreign borrowing in the case of money growth and technology shocks for a small open economy and to analyze the implications of varying degrees of financial integration for aggregate fluctuations and propagation mechanisms in the economy the existence of informational asymmetries among the agents in the model necessitates financial intermediation in the economy moreover there is uncertainty involved in the production process which leads to collateralized borrowing by firms and therefore has to be taken into account in the design of the loan contracts between firms and financial intermediaries it is shown that increasing financial integration amplifies the effect of a positive temporary monetary shock on output consumption investment labor demand and loans whereas it has barely any implication for the impact of a positive temporary technology shock on the economy

on the determination of the external debt the case of israel abstract this paper pursues the econometric implementation of an intertemporal optimization model of the foreign debt with israeli data in this model the private sector faces perfect capital markets and maximizes utility from consumption over an infinite horizon the intertemporal budget constraint recognizes the intertemporal finance equation of the government under these conditions the effect of current disturbances in output government spending and unilateral transfers on private consumption and foreign borrowing is determined by their perceived future persistence the model passes a formal econometric test however some results are also suggestive of omitted considerations

replicating ricardian equivalence tests with simulated series this paper replicates standard consumption function tests of ricardian equivalence using series generated from a model which nests ricardian equivalence within a non ricardian alternative due to finite horizons and or distortionary taxation the author shows that the estimates of the effects of taxation on consumption are not robust and that standard tests may have weaknesses which can lead to conflicting results whether ricardian equivalence holds or not the simulations also show that no clear conclusions about ricardian equivalence can be drawn from observing a low correlation between the current account and government budget deficits copyright 1997 by american economic association

theory based measurement of the saving investment correlation with an application to norway i introduction the findings of feldstein and horioka 19c 0 have led to numerous theoretical and empirical papers on the close correlation between domestic saving and domestic investment and its supposed implications for international capital mobility feldstein and horioka 1980 317 state that with perfect world capital mobility there should be no relation between domestic saving and domestic investment saving in each country responds to the worldwide opportunities for investment while investment in that country is financed by the worldwide pool of capital however in a cross country regression using period averaged saving and investment figures for sixteen oecd countries they obtain a significant coefficient close to unity and conclude that capital is rather immobile this result constitutes the feldstein horicka puzzle as it contradicts the widely held perception that capital is highly mobile across countries subsequent empirical work confirmed the close correlation though its implication for the degree of capital mobility is a moot point see tesar 1991 this paper contributes to the understanding of the puzzle on both theoretical and empirical counts first we present a theory based econometric specification for estimating saving investment correlations second we discuss the possible usefulness of the estimates for detecting capital mobility third we provide empirical results for the interesting case of norway we argue that feldstein and horioka s basic idea that the saving investment correlation contains information about international capital mobility is correct but that the interpretation of the estimated correlation value must be altered substantially in view of the results derived from modern macroeconomic models our research is motivated by the observation that various regression equations have been used to measure the saving investment correlation but that none of them has a firm theoretical foundation this in turn raises questions about the interpretation and comparability of the existing empirical results we propose an econometric specification that is founded in intertemporal general equilibrium models in which agents optimize under intertemporal budget constraints we show that time series studies have estimated misspecified equations and that cross section studies are seriously flawed because they neglect dynamics as a result the puzzle may turn out to be an artifact caused by measurement errors however the significance of reliable measurement of saving investment correlations goes beyond solving the feldstein horioka puzzle because they represent stylized facts open economy models should explain norway serves as a suitable example to cement our methodological arguments with empirical evidence thanks to its system of capital controls which were phased out during the 1970s and 1980s the oil discoveries and its small size we demonstrate that the failure to take structural breaks into account seriously distorts the picture making a strong case for careful diagnostic testing our main empirical result is that the feldstein horioka puzzle does not exist for norway the paper proceeds as follows in section ii we briefly summarize the state of the discussion regarding feldstein and horioka s findings in section iii we derive our specification from the theory compare it to the previous specifications and discuss how to make inferences about capital mobility in section iv we sketch major developments in the post war norwegian economy notably the abolition of capital controls and the emergence of the important oil sector section v presents the empirical results section vi summarizes and concludes ii the feldstein horioka puzzle many authors have confirmed feldstein and horioka s result of a high and stable correlation of saving and investment for oecd countries both in cross country studies and in time series studies

on savings and investment dynamics in a small open economy abstract this paper constructs a stochastic overlapping generations two country model of savings and investment under conditions of perfect international capital mobility the focus of the analysis is on the relationship between savings and investment dynamics in a small open economy in response to stochastic variations in domestic and or foreign production technologies the model is simulated under alternative specifications of the stochastic distribution governing both technologies this provides insight into the very complicated nature and rich diversity of possible relationships between savings and investment dynamics

deficits and intergenerational welfare in open economies this paper deals with public debt in open economies extending diamond s overlapping generations model to a small open economy as well as an international equilibrium of two large economies it focuses on the intergenerational welfare redistributions caused by an increase in public debt triggered by a temporary government budget deficit and shows how these redistributions differ in open and closed economies the interplay between the deficits in the government budget and the current account is also analyzed it is shown how a single period with a government deficit can be followed by a sequence of periods with a deficit in the current account

mfca extension from a circular economy perspective model modifications and case study abstract as an innovative method of environment management accounting ema a model of material flow cost accounting mfca is widely used in the field of cost calculation in the manufacturing process industry and it has obtained a level of achievement in recent years based on the existing literature in the field this report argues that the application of the current mfca model in the process industry has defects such as content restrictions a single accounting index simple methodology and one sided conclusions among others this paper combines the current mfca model with the 3r principle of a circular economy ce and the industry characteristics of high consumption and pollution the research focuses on the iron and steel industry as a representative of a process manufacturing industry and forms a modified mfca model for an iron and steel enterprise according to the perspective of ce the modifications we make to the model occur in the fields of model content the accounting index the methodology of application and the extension of functionality finally through a specific case study this report verifies the comprehensive utility of the proposed modified model in general the modified mfca may to a certain extent be considered innovative in its approach to information and data connections extension of methods and procedures modes of disclosing information construction of evaluation analysis and management of circular decision making each of these elements is conducive to realizing a triple win situation for the conservation of resources energy providing an economic value add reducing the environmental load and enhancing the sustainable development of a resource constrained process industry

variance properties of solow s productivity residual and their cyclical implications abstract for the united states economy 1960 1989 the correlation between the growth rates of the solow residual and the real price of energy government spending is 0 55 0 09 this study develops a model to see if it quantitatively captures the endogenous transmission mechanism underlying the observed solow residual correlations it does the transmission mechanism depends on endogenous capital utilization incorporating shocks to true technology energy prices and government spending the model economy accounts for 76 or 89 percent of u s output volatility and is generally consistent with features of u s business cycles

dynamics of the trade balance and the terms of trade in ldcs the s curve abstract in their analysis of the dynamic behavior of terms of trade and the trade balance backus kehoe and kydland found that the lead and lag correlation between these two variables is s shaped for a set of oecd countries furthermore they show that this s curve can be replicated by a two country dynamic general equilibrium model surprisingly the s curve also describes the dynamic relationship between terms of trade and the trade balance for a large set of ldcs this s curve can also be reproduced by a small open economy model which captures some important features of ldc economies the s curve is unexpectedly robust to variations in the key parameters of the model the model also captures the business cycle properties of the ldc data

macroeconomic interdependence under incomplete markets this paper uses a two country flexible price model with overlapping generations of infinitely lived households to study the role of net foreign asset dynamics in the propagation of productivity shocks absence of ricardian equivalence ensures existence of a unique steady state level of net foreign assets to which the economy returns following temporary shocks model dynamics are significantly different from those of a setup in which terms of trade movements perform all the international adjustment and net foreign assets do not move the difference relative to a complete markets economy in which net foreign asset movements play no role in shock transmission is smaller it is amplified if the substitutability across goods rises and if shocks are permanent

policy reform shadow prices and market prices how should public projects and policy reforms be assessed when market prices give misleading signals revenues and costs at market prices then give distorted measures of social gains and losses and our appraisal should use social opportunity costs or shadow prices we show how shadow prices may be integrated into an analysis of policy reform demonstrate the critical dependence of these prices on government policy and analyse their relations with market prices the model allows for a wide range of sources of impairment of price signals we also discuss key issues in the analysis of price reform and privatisation

an empirical behavioral model of liquidity and volatility abstract we develop a behavioral model for liquidity and volatility based on empirical regularities in trading order flow in the london stock exchange this can be viewed as a very simple agent based model in which all components of the model are validated against real data our empirical studies of order flow uncover several interesting regularities in the way trading orders are placed and cancelled the resulting simple model of order flow is used to simulate price formation under a continuous double auction and the statistical properties of the resulting simulated sequence of prices are compared to those of real data the model is constructed using one stock azn and tested on 24 other stocks for low volatility small tick size stocks called group i the predictions are very good but for stocks outside group i they are not good for group i the model predicts the correct magnitude and functional form of the distribution of the volatility and the bid ask spread without adjusting any parameters based on prices this suggests that at least for group i stocks the volatility and heavy tails of prices are related to market microstructure effects and supports the hypothesis that at least on short time scales the large fluctuations of absolute returns r are well described by a power law of the form p r r r r with a value of r that varies from stock to stock

currency prices terms of trade and interest rates a general equilibrium asset pricing cash in advance approach currency prices terms of trade and interest rates a general equilibrium asset pricing cash in advance approach

relative shadow prices and the shadow exchange rate abstract the divergent conclusions that have been reached in the literature as to the role of the shadow exchange rate in project appraisal are reconciled in this paper it is shown that the shadow exchange rate is not needed to assess the relative shadow prices of either traded or nontraded goods

the terms of trade and the current account the harberger laursen metzler effect the paper examines the effect of terms of trade changes on a small country s spending and current account assuming optimizing behavior in an intertemporal framework with perfect international capital mobility a temporary future terms of trade deterioration implies a deterioration improvement of the trade balance whereas a permanent terms of trade deterioration has an ambiguous effect depending on the rate of time preference nominal and real variables are considered via exact price indexes two periods and an infinite horizon are examined

current account dynamics and the terms of trade harberger laursen metzler two generations later this is a study of the current account dynamics resulting from the savings and investment dynamics in a small open economy which is subject to exogenous changes in its terms of trade and in world interest rates anticipated and unanticipated as well as temporary and permanent terms of trade changes have very different effects there is however a general tendency towards cycles in both savings and investment which gives rise to cycles in the current account it is shown that the classic harberger laursen metzler effect on saving of a terms of trade deterioration can have any sign for plausible parameter values both for temporary and permanent disturbances

fiscal policy and saving under distortionary taxation an empirical investigation of the e ects of fiscal policy on saving is carried out using israeli data which display large variability in both the saving rate and the fiscal variables the framework is a small open economy model with distortionary taxation the theoretical analysis of the partial e ect of each fiscal variable on the national saving rate takes into account the necessary adjustment in future taxes the present model predicts for example that the income tax rate should have a negative e ect on saving in contrast to the keynesian view and that transfer payments and interest payments on the public debt should have positive e ects in contrast to the ricardian view under lump sum taxation the empirical results partly support the predictions of the model in particular for the income tax rate the methodology consists of two steps first quantitative predictions are obtained via simulation and then the simulated e ects are compared with the estimated coe cients 1998 elsevier science b v all rights reserved jel classification e62

material flow cost accounting and existing management perspectives abstract material flow cost accounting mfca has been developed worldwide as a major tool in environmental management accounting the international standard on mfca was published as iso 14051 in 2011 in japan the ministry of economy trade and industry meti has been strongly supporting the promotion of mfca and the number of companies introducing this tool has been steadily increasing however in order to apply mfca in companies continuously it is necessary to overcome conflicts between mfca and existing management perspectives this paper argues that such conflicts are likely to be caused by the essential features of mfca and indicates some theoretical solutions based on organizational design then by looking at three example cases of companies that have succeeded in the continuous use of mfca specific countermeasures for dealing with conflicts are investigated

project appraisal procedures and the evaluation of foreign exchange different procedures for evaluating foreign exchange have been suggested in the project appraisal manuals of unido and little and mirrlees while it is widely agreed that the manuals differ in their practical procedures there has been disagreement as to whether they are equivalent in principle using a model due to boadway we show that the manuals differ in principle the little mirrlees procedure can be given an interpretation which correctly values traded and non traded goods in project appraisal while the unido formula for the shadow exchange rate is not required when the balance of payments constraint is binding

the feldstein horioka puzzle revisited a monte carlo study abstract this study revisits the feldstein horioka fh puzzle by employing a variety of asymptotically efficient cointegration estimators and by using the critical values obtained from monte carlo simulations to test the hypothesis of a unit retention coefficient this leads to a lower rejection of the null than standard critical values would have implied despite ample evidence supporting the fh result there appears to be considerable heterogeneity in terms of the savings investment association and only 25 of the 23 oecd countries we examine can be characterised as open economies in the fh sense whether or not one subscribes to the fh interpretation the fh result does not appear to be robust

explaining saving investment correlations national saving and investment rates are highly positively correlated in virtually all countries this is puzzling as it apparently implies a low degree of international capital mobility this paper shows that the observed positive correlation between national saving and investment rates arises naturally within a quantitatively restricted equilibrium model with perfect mobility of financial and physical capital the model is consistent with the fact that saving investment correlations are larger for larger countries but are still substantial for small countries further the model is consistent with the finding that current account deficits tend to be associated with investment booms copyright 1993 by american economic association

intertemporal optimizing models of trade and current account balance a survey abstract this study surveys the intertemporal optimizing models of trade and current account balance that were developed calibrated and empirically tested since they came into vogue in the 1980s the implications of these models often differ from those of static and dynamic conventional non optimizing models the literature on optimizing models has not only grown reasonably fast but has also witnessed significant advances in methodology and these models have culminated into a distinct strand of new open economy macroeconomics the studies conducted until the late 1980s have used deterministic perfect foresight models while several studies conducted since the 1990s relax the perfect foresight and certainty equivalence assumptions and develop stochastic dynamic general equilibrium models to account for uncertainty confronting the optimizing agents the future research needs to explore the possibility of tracing any preferred specification of household preferences model the effect of time varying discount factor on household utility function and intertemporal budget constraint examine the role of costs in international trade place a parallel emphasis on the empirical verifications of theoretical propositions examine the relative performance of optimizing vis a vis non optimizing models and rationalize the extreme propositions of perfect and imperfect capital mobility in the wake of moderately open capital accounts

money and asset prices in a cash in advance economy an asset pricing model with money introduced via a cash in advance constraint is presented the monetary velocity is variable hence money demand does not obey the trivial quantity equation the effects of disturbances in output and money growth on real balances the price level and interest rates are examined monetary policy has effects on real asset prices the fisher relation and the premium on nominal bonds are discussed the precise role of the timing of information and transactions for properties of price levels and interest rates are clarified

the international transmission of economic fluctuations abstract this paper suggests that for a wide class of international real business cycle models including models with imperfect competition the traditional channels of international transmission of business cycles through world interest rate and terms of trade variations cannot explain the cyclical response of the canadian economy to innovations in u s output empirically testable quantitative models of the effects on canadian economic activity of shocks to the u s economy are developed and their empirical relevance is tested by comparing impulse responses estimated from vector autoregressions to the quantitative predictions of the theoretical models

the dynamics of a small open economy in response to monetary fiscal and productivity shocks abstract this paper evaluates empirically the relative importance of monetary and fiscal versus technology shocks in an open economy characterized by perfect international capital mobility the variance covariance matrix of these shocks is estimated a stochastic model is used to perform numerical simulations the results show that persistent shocks to productivity can reproduce several empirical regularities including the puzzling high correlation between national saving and investment remarkably well and that monetary and fiscal shocks play a minor role

estimating saving investment correlations evidence for oecd countries based on an error correction model abstract saving investment correlations are important stylized facts in open economy macroeconomics and indicators of capital mobility they are best estimated by an error correction model ecm because an ecm is consistent with intertemporal general equilibrium models the ecm is a synthesis of previous approaches applying the ecm to the oecd countries we find that in general saving and investment are cointegrated the ecm is more powerful in detecting cointegration than the two step engle granger procedure estimates of the saving investment correlation are robust with respect to overdifferencing we find evidence of a large country effect and an increase in capital mobility within the oecd area

productivity shocks non traded goods and optimal capital accumulation this paper considers the interaction of saving and investment in determining the current account for a small open economy subjected to productivity shocks by emphasizing the distinction between traded and non traded goods the analysis highlights the crucial role of the real exchange rate in macroeconomic adjustment our results demonstrate the importance of intertemporal substitution for determining the response of investment to anticipated productivity disturbances we also show how the correlation of movements in saving and investment following an anticipated disturbance depends critically on relative sectoral factor intensities

the saving investment correlation puzzle is still a puzzle abstract a number of simulation studies claim to have solved the feldstein horioka puzzle by demonstrating that a high time series correlation between saving and investment naturally arises from business cycle shocks this paper uses panel data of saving and investment controlled for business cycle shocks to empirically test the significance of cyclical shocks productivity fiscal and the terms of trade shocks in explaining a high saving investment correlation the estimation results reveal that conventional aggregate shocks only partially explain the high saving investment correlation moreover country differences in the size of the gnp and the non traded sector do not significantly affect the saving investment correlation the saving investment correlation puzzle remains a puzzle after all

international and intranational business cycles this paper surveys and analyzes the international real business cycle literature we re explore two international business cycle anomalies emphasized by backus kehoe and kydland 1995 as well as establishing the pattern of productivity growth between industries and countries we then compare these findings for the international business cycle to those obtained for data between regions within a country the so called intranational business cycle importantly the intranational business cycle is a natural environment for thinking about the interactions between economies when there are no trade frictions and when there are not multiple currencies we summarize our findings with a comparison between the stylized facts for international and intranational business cycles and draw some policy conclusions copyright 1997 by oxford university press

shadow prices for project evaluation under alternative macroeconomic specifications for purposes of social cost benefit analysis a project may be viewed as a disturbance to the economy displacing it from some initial equilibrium to a new one but the new configuration will depend on which particular variables adjust to restore equilibrium this paper examines the shadow prices for project evaluation under alternative assumptions about how equilibrium is restored when the government reacts by altering its foreign exchange reserves the shadow prices coincide with those advocated in the manuals on social cost benefit analysis however if the government adjusts its domestic expenditures or tariff rates the shadow prices will differ from those of the manuals except insofar as the relative shadow prices of tradeables remain their relative border prices the paper first presents the model followed by two cases in which domestic prices and wage rates do not vary because ad valorem tariffs are fixed and one case in which they are endogenous

project appraisal procedures and the evaluation of foreign exchange a comment in 1986 dinwiddy and teal analyzed the shadow exchange rate ser in a tariff distorted small economy containing two traded and one non traded good contrary to their claim i maintain a ser is inherent to their model even if the balance of payments constraint is binding it equals the value of the marginal consumption basket at market prices divided by its value at world or foreign exchange equivalent fee prices shadow prices defined in welfare terms equal the products of the ser and 1 the world or fee prices of goods or 2 marginal products of factors at world prices copyright 1990 by the london school of economics and political science

the role of saving and investment in exchange rate determination under alternative monetary mechanisms abstract we argue that the demand for national currencies depends on existing payment arrangements for imports and exports therefore exchange rate movements depend on these arrangement as a result the relationship between exchange rate movements and various macroeconomic aggregates like saving and investment depend on what we call the monetary mechanism these points are explicitly demonstrated by studying two extreme monetary mechanisms one in which all payments are done with the seller s currency and one in which all payments are done with the buyer s currency

material flow cost accounting looking back and ahead abstract material flow cost accounting mfca combines physical flows and monetary units and is located between energy and material efficiency analyses environmental management and managerial accounting procedures since the development of iso 14051 2011 research and application in industry increased but still some theoretical methodological and practical gaps exist this special volume addresses some of the existing deficits and shows the fertile contribution of mfca on resource efficiency as can been seen by the articles and case studies in this special volume mfca still is continuously spreading into further countries and the methodology is extended refined and elaborated and increasingly applied in combination with various other tools and concepts the main challenges are still the continuous implementation of the method in industry and the public dissemination of the results

adjustment costs in investment time preferences and the current account abstract this paper studies the effects of supply and demand shocks on the optimal investment and savings decisions of economic agents in a small open economy the two building blocks of the setup are adjustment costs in investment and a recursive time preference structure it is shown that the model can mimic certain stylized facts

capital movements intersectoral resource shifts and the trade balance abstract in this paper i consider the interactions between the internal structure of the economy and its external balance in an intertemporal set up with perfect foresight a simple pattern emerges current account deficits are associated with depreciating real exchange rates the incorporation of real investments and government spendings change this pattern in a systematic way depending on factor intensities the composition of government spending and its timing

risk and capital accumulation in a small open economy this paper examines the dynamics of capital accumulation in a small open economy where home capital is risky and consumers are risk averse it is assumed that the economy participates in perfect international bond markets but that risky home capital is held by domestic residents only under these assumptions the rate of investment is no longer independent of the saving rate and they are positively related as a result a rise in savings does not increase foreign investment by the same amount but by less and in some situations the quantity of foreign assets may even decrease

consumption real exchange rates and the structure of international asset markets abstract international real business cycle irbc models that assume complete asset markets yield strong restrictions for consumption and bilateral real exchange rate series empirical tests with data for the us japan france uk italy canada and sweden suggest that neither the trend behavior nor high frequency movements of consumption and real exchange rates are well explained by irbc models with complete markets it appears however that high frequency fluctuations of consumption and real exchange rates are consistent with unrestricted international trade in risk free bonds

crowding out in open economies results from a simulation study it has recently been shown that industrialized countries in the 1970s and 1980s are characterized by a high correlation between national saving and investment this regularly is considered puzzling in the context of highly integrated international capital markets in this paper the author shows that both the failure of real interest parity and productivity changes are each sufficient to generate a high positive correlation between national saving and investment these results indicate that it is easier than previously thought to reproduce a high correlation between saving and investment in models with perfect capital mobility

savings investment and international capital flows abstract the high correlation between national savings and domestic investment rateshas been interpreted as evidence that capital is not internationally mobile this paper surveys the theory and evidence on the relationship between savings and investment in a sample of 23 oecd countries a positive correlation between savings and investment rates is found in both the short and long runs however a wide variety of models generate such co movements in savings and investment in response to exogenous disturbances even under conditions of complete financial markets thus the savings investment correlation provides little evidence on the question of international capital mobility

currency preferences purchasing power risks and the determination of exchange rates in an optimizing model most recent research on the theory of exchange rate determination treats the exchange rate as the relative price of two assets domestic money and foreign money the value of an asset depends on the distribution of its return however most of the research has dealt with models in which there is no uncertainty the present paper focuses on questions that cannot be addressed in a world of certainty because in such a world an asset is never risky it investigates how purchasing power risks affect the determination of exchange rates this investigation is pursued in a fairly general optimizing model the present research is related to some recent work in international economics and in financial economics it follows the approach of obstfeld 1981 and stockman 1980 in that it uses an optimizing model and takes into account the role of government transfers in the flow budget constraint of individuals as in calvo and rodriguez 1977 stockman 1980 and others the fact that holdings of foreign monies are useful to domestic individuals is taken into account finally the paper uses techniques developed in papers in the finance literature which build on merton s 1973 asset pricing model and use a concept of equilibrium developed in

macroeconomic policy exchange rate dynamics and optimal asset accumulation the paper develops a model of exchange rate and current account determination for a small economy peopled by infinitely lived utility maximizing households in this setting a central bank purchase of foreign exchange has no real effects when central bank foreign reserves earn interest at the world rate and proceeds are returned to the public in contrast an increase in the monetary growth rate does have real effects even in the long run the model developed here implies that an increase in government spending may lead to a surplus on current account the external adjustment process predicted by the model is one in which consumption real balances and external assets all rise or fall simultaneously

capital flows investment and exchange rates abstract this paper incorporates international capital flows into a two country monetary general equilibrium model of asset prices with investment and production we calculate theoretical covariances between investment the current account the exchange rate and the terms of trade these covariances depend upon the coefficient of relative risk aversion the magnitude and sign of a country s net international indebtedness other properties of tastes and technologies and the stochastic processes on disturbances to productivity and monetary growth rates international capital flows arise from changes in world wealth and its relative composition in foreign and domestic assets