Macroeconomic Policies and Foreign Asset Accumulation in a Finite-Horizon Model

This paper considers foreign asset holdings and macroeconomic policies in a finite-horizon model with real balances and foreign asset holdings in a small open economy. Both the long- and short-run effects of these macroeconomic policies on the economy are reexamined. The main results stand in striking contrast to those of Obstfeld (1981), who used an endogenous time preference. (1) Foreign exchange intervention leads to more foreign asset holdings and more consumption in the long run. However, it affects foreign asset accumulation ambiguously. (2) Inflation results in more foreign asset accumulation and consumption, but the effect of inflation on real balance holdings is ambiguous. (3) Government spending affects foreign asset accumulation ambiguously, and it always reduces real balances and crowds out private consumption.