This paper develops a welfare-based model of monetary policy in an open economy. We focus on the extent to which monetary policy should be employed in stabilising the exchange rate. The traditional approach maintains that exchange rate flexibility is desirable in the presence of real...

This paper develops a view of exchange rate policy as a trade-off between the desire to smooth fluctuations in real exchange rates so as to reduce distortions in consumption allocations, and the need to allow flexibility in the nominal exchange rate so as to facilitate terms of trade adjustment....

This paper develops a model of endogenous exchange rate pass-through within an open economy macroeconomic framework, where both pass-through and the exchange rate are simultaneously determined, and interact with one another. Pass-through is endogenous because firms choose the currency in which...

Both empirical evidence and theoretical discussion has long emphasized the impact of ¡¥news¡¦ on exchange rates. In most exchange rate models, the exchange rate acts as an asset price, and as such responds to news about future returns on assets. But the exchange rate also plays a role in...

The well-known uncovered interest parity puzzle arises from the empirical regularity that, among developed country pairs, the high interest rate country tends to have high expected returns on its short term assets. At the same time, another strand of the literature has documented that high real...

The paper draws a link between the conditions for low pass-through when there are flexible prices, and local-currency pricing when there are sticky nominal prices. It shows that the condition under which pass-through is less than one-half when prices are flexible is the same as the condition...

Recent macroeconomic experience has drawn attention to the importance of interdependence among countries through financial markets and institutions, independently of traditional trade linkages. This paper develops a model of the international transmission of shocks due to interdependent...

Open economy macroeconomics typically abstracts from portfolio structure. But the recent experience of financial globalisation makes it important to understand the determinants and composition of gross country portfolios. This paper presents a simple approximation method for computing...

We study the classic transfer problem of predicting the effects of an international transfer on the terms of trade and the current account. A two-country model with debt and capital allows for realistic features of historical transfers: they follow wartime increases in government spending and...

A central aspect of the recent debate on global imbalances and the US current account deficit is the role of the exchange rate peg being followed by China and other Asian economies. While one view has stressed the need for Asian currency appreciation, another focuses on the importance of fiscal...