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Capital Mobility and Devaluation in an Optimizing Model with Rational Expectations

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  • Maurice Obstfeld

Abstract

This paper examines the effects of ex-change-rate policies when individuals maximize lifetime utility on the basis of rational expectations about the future. The economy studied is one in which the authorities allow free mobility of capital under a crawling-peg exchange-rate regime. Many industrializing economies have adopted a crawling peg as a means of reconciling disparate inflation rates at home and abroad, and some recent efforts to use the rate of crawl as an instrument of anti-inflation policy have attracted considerable interest (see Carlos Diaz Alejandro). Tools similar to those employed here have been applied by Guillermo Calvo (forthcoming) to study this type of exchange-rate management under conditions of capital immobility.

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  • Maurice Obstfeld, 1980. "Capital Mobility and Devaluation in an Optimizing Model with Rational Expectations," NBER Working Papers 0557, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:0557
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    1. Dornbusch, Rudi, 1996. "The Effectiveness of Exchange-Rate Changes," Oxford Review of Economic Policy, Oxford University Press and Oxford Review of Economic Policy Limited, vol. 12(3), pages 26-38, Autumn.
    2. Frenkel, Jacob A & Rodriguez, Carlos Alfredo, 1975. "Portfolio Equilibrium and the Balance of Payments: A Monetary Approach," American Economic Review, American Economic Association, vol. 65(4), pages 674-688, September.
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