Monetary and Economic Studies Vol.20, No. S-1 / December 2002

"Exchange Rate Regimes in the 21st Century," Keynote Speech, Exchange Rates and Adjustment: Perspectives from the New Open-Economy Macroeconomics

Maurice Obstfeld

The new open-economy macroeconomics has allowed economists to tackle classical problems with new tools, while also generating new ideas and questions. In their attempts to make the new models capture empirical regularities, researchers have entertained a variety of assumptions about the international pricing of goods, notably, models of pricing to market and destination-currency pricing of exports. Some of the resulting models imply that exchange rate changes lack international expenditure-switching effects, and they thus appear to call for a radical rethinking of the role of exchange rates in international adjustment. This paper argues that the recent resurgence of exchange rate pessimism stems from oversimplified modeling strategies rather than from evidence. Like earlier episodes starting with the extreme "elasticity pessimism" of the early postwar era, it is based on a misinterpretation of the empirical record.

Keywords: Exchange rate policy; International adjustment; Expenditure-switching effects; Elasticity pessimism; International competitiveness

Views expressed in the paper are those of the authors and do not necessarily reflect those of the Bank of Japan or Institute for Monetary and Economic Studies.

Copyright © 2002 Bank of Japan All Rights Reserved.

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