IDEAS home Printed from https://ideas.repec.org/p/cwl/cwldpp/769.html
   My bibliography  Save this paper

The Balance of Payments Adjustment Mechanism in a Rational Expectations Equilibrium

Author

Abstract

This paper provides a choice theoretic, general equilibrium account of the balance of payments adjustment process and the determination of national price levels in a world comprised of countries populated by rational households. Balance of payments adjustment dynamics arise in the equilibrium of this model from the precautionary saving behavior of risk-averse households who self-insure against random productivity fluctuations by accumulating, via balance of payments surpluses in productive periods, buffer stocks of domestic money which can be drawn down to finance payments deficits, and thus a less variable profile of consumption relative to output, when productivity is unexpectedly low. Precautionary saving is shown to exhibit the partial-adjustment-to-target behavior typically postulated in the monetary approach literature. The existence of a rational expectations equilibrium in which the distribution of international reserves among central banks is stationary is established.

Suggested Citation

  • Richard H. Clarida, 1985. "The Balance of Payments Adjustment Mechanism in a Rational Expectations Equilibrium," Cowles Foundation Discussion Papers 769, Cowles Foundation for Research in Economics, Yale University.
    • Handle: RePEc:cwl:cwldpp:769
    as

    Download full text from publisher

    File URL: https://cowles.yale.edu/sites/default/files/files/pub/d07/d0769.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Duncan K. Foley & Martin F. Hellwig, 1975. "Asset Management with Trading Uncertainty," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 42(3), pages 327-346.
    2. Dornbusch, Rudiger, 1973. "Devaluation, Money, and Nontraded Goods," American Economic Review, American Economic Association, vol. 63(5), pages 871-880, December.
    3. Lucas, Robert E, Jr, 1980. "Equilibrium in a Pure Currency Economy," Economic Inquiry, Western Economic Association International, vol. 18(2), pages 203-220, April.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Kvedaras, Virmantas & Garcimartín, Carlos & Astudillo, Jhonatan, 2020. "Balance-of-Payments constrained growth dynamics: An empirical investigation," Economic Modelling, Elsevier, vol. 89(C), pages 232-244.
    2. Peter Englund & Anders Vredin, 1990. "The current account, supply shocks and accommodative fiscal policy : interpretations of Swedish post-war data," Finnish Economic Papers, Finnish Economic Association, vol. 3(2), pages 89-107, Autumn.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Carl E. Walsh, 1985. "Borrowing Restrictions and Wealth Constraints: Implications for Aggregate Consumption," NBER Working Papers 1629, National Bureau of Economic Research, Inc.
    2. Faig, Miquel, 2000. "Money with Idiosyncratic Uninsurable Returns to Capital," Journal of Economic Theory, Elsevier, vol. 94(2), pages 218-240, October.
    3. Faig, Miquel, 2000. "The Optimal Structure of Liquidity Provided by a Self-Financed Central Bank," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(4), pages 746-765, November.
    4. Wilbur John Coleman, 1991. "Precautionary money balances with aggregate uncertainty," International Finance Discussion Papers 399, Board of Governors of the Federal Reserve System (U.S.).
    5. Wen, Jean-Francois & Love, David R. F., 1998. "Evaluating Tax Reforms in a Monetary Economy," Journal of Macroeconomics, Elsevier, vol. 20(3), pages 487-508, July.
    6. Yi Wen, 2011. "Making sense of China’s astronomical foreign reserves," Working Papers 2011-018, Federal Reserve Bank of St. Louis.
    7. Dimitrios Tsomocos, 2003. "Equilibrium analysis, banking, contagion and financial fragility," FMG Discussion Papers dp450, Financial Markets Group.
    8. Brunnermeier, Markus K. & Niepelt, Dirk, 2019. "On the equivalence of private and public money," Journal of Monetary Economics, Elsevier, vol. 106(C), pages 27-41.
    9. repec:phd:pjdevt:jpd_1990_vol__xvii_no__2-d is not listed on IDEAS
    10. Stein, Ernesto H. & Streb, Jorge M., 2004. "Elections and the timing of devaluations," Journal of International Economics, Elsevier, vol. 63(1), pages 119-145, May.
    11. Chin, Chi-Ting & Guo, Jang-Ting & Lai, Ching-Chong, 2009. "Macroeconomic (in)stability under real interest rate targeting," Journal of Economic Dynamics and Control, Elsevier, vol. 33(9), pages 1631-1638, September.
    12. Thomas J. Sargent, 1982. "The Ends of Four Big Inflations," NBER Chapters, in: Inflation: Causes and Effects, pages 41-98, National Bureau of Economic Research, Inc.
    13. Dubey, Pradeep & Geanakoplos, John, 2003. "Monetary equilibrium with missing markets," Journal of Mathematical Economics, Elsevier, vol. 39(5-6), pages 585-618, July.
    14. George H. Borts & James A. Hanson, 1979. "The Monetary Approach to the Balance of Payments with an Empirical Application to the Case of Panama," NBER Chapters, in: Short-Term Macroeconomic Policy in Latin America, pages 257-288, National Bureau of Economic Research, Inc.
    15. Michael Frenkel & Gil Mehrez, 1997. "The Misallocation of Resources of Anticipated Inflation," Macroeconomics 9706003, University Library of Munich, Germany.
    16. Max Gillman & Michal Kejak, 2005. "Inflation and Balanced-Path Growth with Alternative Payment Mechanisms," Economic Journal, Royal Economic Society, vol. 115(500), pages 247-270, January.
    17. Gabriele Camera & YiLi Chien, 2013. "Modeling monetary economies: an equivalence result," Working Papers 2013-009, Federal Reserve Bank of St. Louis.
    18. Lola Hernandez & Nicole Jonker & Anneke Kosse, 2017. "Cash versus Debit Card: The Role of Budget Control," Journal of Consumer Affairs, Wiley Blackwell, vol. 51(1), pages 91-112, March.
    19. Jeffrey A. Frankel & Shang-Jin Wei, 2004. "Managing Macroeconomic Crises," NBER Working Papers 10907, National Bureau of Economic Research, Inc.
    20. Thomas Philippon, 2015. "Has the US Finance Industry Become Less Efficient? On the Theory and Measurement of Financial Intermediation," American Economic Review, American Economic Association, vol. 105(4), pages 1408-1438, April.
    21. Juergen Huber & Martin Shubik & Shyam Sunder, 2011. "Financing of Public Goods through Taxation in a General Equilibrium Economy: Theory and Experimental Evidence," Cowles Foundation Discussion Papers 1830, Cowles Foundation for Research in Economics, Yale University.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cwl:cwldpp:769. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Brittany Ladd (email available below). General contact details of provider: https://edirc.repec.org/data/cowleus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.