A fixed exchange rate limits the ability of the real exchange rate to adjust to shocks, and tends to raise the volatility of real GDP. But adjustment may be enhanced if internal prices are more flexible under a fixed exchange rate. This Paper develops a model in which price setters incur a cost...

A classic argument for flexible exchange rates is that the exchange rate plays a ‘shock-absorber' role in an open economy hit by country specific shocks. This Paper presents a sharp counterexample to this argument within a very simple open economy model. Countries are subject to unpredictable...

This Paper investigates the effects of exchange rate regimes and alternative monetary policy rules for an emerging market economy that is subject to a volatile external environment in the form of shocks to world interest rates and the terms of trade. In particular, we highlight the impact of...

This Paper illustrates a model of predetermined pricing based on the work of Fischer (1977), where firms set a fixed schedule of nominal prices at the time of price readjustment. This type of price-setting specification cannot produce any excess persistence in a fixed duration model of staggered...

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

This paper presents a general approximation method for characterizing time-varying equilibrium portfolios in a two-country dynamic general equilibrium model. The method can be easily adapted to most dynamic general equilibrium models, it applies to environments in which markets are complete or...

The process of financial globalization has significantly altered the environment in which national monetary policy authorities operate. What implications does this have for the design of monetary policy? The question can be properly addressed only in the context of a model where monetary policy...

Over the one and a half decades prior to the global financial crisis, advanced economies experienced a large growth in gross external portfolio positions. This phenomenon has been described as Financial Globalization. Over roughly the same time frame, most of these countries also saw a...