Maurice Obstfeld

University of California, Berkeley | UCB · Department of Economics

This paper revisits the debate on ruling out speculative hyperinflations in monetary models. Although apparently a narrow issue, studying these extreme economies turns out to be quite illuminating in understanding the fundamentals of price level determination. It is also relevant in evaluating the broader claims that advocates of the fiscal theory...

How big is the elasticity of substitution between goods from different countries-the Armington elasticity? Estimates of the macroelasticity between home and imported goods are often smaller than the microelasticity between foreign sources of imports. Using new, highly disaggregate U.S. production data matched to imports and simulated data from a Me...

In this essay, we highlight the interactions of the international monetary system with financial conditions, not just with the output, inflation, and balance of payments goals usually discussed. We review how financial conditions and outright financial crises have posed difficulties for each of the main international monetary systems in the last 15...

Because of recent economic crises, financial fragility has regained prominence in both the theory and practice of macroeconomic policy. Consistent with macroeconomic paradigms prevalent at the time, the original architecture of the euro zone assumed that safeguards against inflation and excessive government deficits would suffice to guarantee macro...

Do global current account imbalances still matter in a world of deep international financial markets where gross two-way financial flows often dwarf the net flows measured in the current account? Contrary to a complete markets or 'consenting adults' view of the world, large current account imbalances, while very possibly warranted by fundamentals a...

No abstract available.

This paper reviews the theoretical functions, history, and policy problems raised by the international capital market. The goal is to offer a perspective on both the considerable advantages the market offers and on the genuine hazards it poses, as well as on the avenues through which it constrains national policy choices. A duality of benefits and...

In this lecture I document the proliferation of gross international asset and liability positions and discuss some of the consequences for individual countries’ external adjustment processes and for global financial stability. In light of the rapid growth of gross global financial flows and the serious risks associated with them, one might wonder a...

All schemes to enhance global liquidity require a higher level of fiscal support and coordination from the international community. Loans to troubled sovereigns or financial institutions imply a credit risk that ultimately must be lodged somewhere. Expanded international lending facilities, including an expanded International Monetary Fund, require...

A key precursor of twentieth-century financial crises in emerging and advanced economies alike was the rapid buildup of leverage. Those emerging economies that avoided leverage booms during the 2000s also were most likely to avoid the worst effects of the twenty-first century's first global crisis. A discrete-choice panel analysis using 1973-2010 d...

No abstract available.

This paper explores the connection between the much-debated global current account imbalances of the past decade and the U.S. financial collapse. It argues that the connection is an intimate one, although nothing so simple as cause and effect. Instead, the imbalances were a primary symptom of forces that led directly to the financial crash. The pap...

This paper makes a case that the global imbalances of the 2000s and the recent global financial crisis are intimately connected. Both have their origins in economic policies followed in a number of countries in the 2000s and in distortions that influenced the transmission of these policies through U.S. and ultimately through global financial market...

The recent financial crisis teaches important lessons regarding the lender-of-last resort (LLR) function. Large swap lines extended in 2007-08 from the Federal Reserve to other central banks show that the classic concept of a national LLR fails to address key vulnerabilities in a globalized financial system with multiple currencies. What system of...

In this paper we connect the events of the last twelve months, "The Panic of 2008" as it has been called, to the demand for international reserves. In previous work, we have shown that international reserve demand can be rationalized by a central bank's desire to backstop the broad money supply to avert the possibility of an internal/external doubl...

Despite an abundance of cross-sectional, panel, and event studies, there is strikingly little convincing documentation of direct positive impacts of financial opening on the economic welfare levels or growth rates of developing countries. The econometric difficulties are similar to those that bedevil the literature on trade openness and growth thou...

This paper explores the links between macroeconomic developments, especially monetary policy, and the exchange rate during the period of Japan's bubble economy and subsequent stagnation. The yen experienced epic gyrations over that period, starting with its rapid ascent after the March 1985 Plaza Accord of major industrial countries. Two distinct p...

This paper revisits the sticky-price pricing-to-market model of Devereux and Engel [Devereux, M.B., Engel, C., 2003. Monetary policy in the open economy revisited: price setting and exchange-rate flexibility. Review of Economic Studies 70(4), 765-783], in which fixed exchange rates are optimal even in the face of country-specific nonmonetary shocks...

These remarks were presented at the 2008 International Conference, gFrontiers in Monetary Theory and Policy,h held by the Institute for Monetary and Economic Studies, Bank of Japan, in Tokyo on May 28-29, 2008.

Fundamental to international finance is the idea of ‘external balance’, whereby a country’s external indebtedness does not threaten its ability to meet its international obligations. The requirements of external balance have varied with the nature of the linkages among economies across historical episodes. This article both reviews the major develo...

This report examines the process of economic and financial integration in East Asia in the light of Europe's experience.� The report provides a comprehensive analysis of East Asian monetary and financial integration process (including a deep analysis of East Asia's response to the 1997-98 financial crisis), a comprehensive critical survey of the li...

In the face of huge balance of payments surpluses and internal inflationary pressures, China has been in a classic conflict between internal and external balance under its U.S. dollar currency peg. Over the longer term, Chinafs large, modernizing, and diverse economy will need exchange rate flexibility and, eventually, convertibility with open capi...

Even when the exchange-rate plays no expenditure-switching role, countries may wish to have ‡exible exchange rates in order to free the domestic interest rate as a stabilization tool. In a setting with nontraded goods, exchange-rate movements may also enhance international risk sharing. The beauty of economics as an intellectual pursuit is its posi...

Abstract Confronting a prolonged period of slow growth, Japan has recently faced a difficult policy environment, with large budget deficits apparently precluding the use of traditional fiscal stimulus, and zero short-term interest rates apparently precluding the use of traditional monetary stimulus. This paper reconsiders each of these conclusions....

In the face of huge balance of payments surpluses and internal inflationary pressures, China has been in a classic conflict between internal and external balance under its dollar currency peg. Over the longer term, China’s large, modernizing, and diverse economy will need exchange rate flexibility and, eventually, convertibility with open capital...

This paper presents a quantitative evaluation of the effect on the yen of some alternative scenarios under which Japan reaches current account balance. The analytical framework is a global general equilibrium model, based closely on Obstfeld and Rogoff (2005a, b), within which relative prices clear the world markets for traded goods as well as the...

The exchange-rate regime is often seen as constrained by the monetary policy trilemma, which imposes a stark tradeoff among exchange stability, monetary independence, and capital market openness. Yet the trilemma has not gone without challenge. Some argue that under the modern float there could be limited monetary autonomy; others, that even under...

Prevalent thinking about liquidity traps suggests that the perfect substitutability of money and bonds at a zero short-term nominal interest rate renders open-market operations ineffective for achieving macroeconomic stabilization goals. We show that even were this the case, there remains a powerful argument for large-scale open market operations a...

We develop a three-region economic model to assess how a significant reduction in global current account imbalances might impact dollar, euro, and Asian real exchange rates under alternative scenarios. Sizable exchange rate shifts appear to be a necessary corollary of adjustment even under otherwise relatively benign scenarios where appropriate pol...

We show that the when one takes into account the global equilibrium ramifications of an unwinding of the US current account deficit, currently running at more than 6% of GDP, the potential collapse of the dollar becomes considerably larger than our previous estimates (Obstfeld and Rogoff 2000a) - as much as 30% or even higher. It is true that globa...

The United States deficit on current account, now running at an annual rate of over $700 billion, has reached levels (as a percent of U.S. GDP) not seen since the first decades of the nineteenth century. The deficit is soaking up roughly three-quarters of the world's available external surpluses. Were the deficit to continue at this pace, the U.S....

The U.S. deficit in the current account, now running at an annual rate of over US$700 billion, has reached levels (as a percentage of GDP) not seen since the first decades of the 19th century. The deficit is soaking up roughly three-quarters of the world's available external surpluses. If the deficit continues at this pace, the U.S. could ultimatel...

The interwar period was marked by the end of the classical gold standard regime and new levels of macroeconomic disorder in the world economy. The interwar disorder often is linked to policies inconsistent with the constraint of the openeconomy trilemma-the inability of policymakers simultaneously to pursue a fixed exchange rate, open capital marke...

This book presents an economic survey of international capital mobility from the late nineteenth century to the present. The authors examine the theory and empirical evidence surrounding the fall and rise of integration in the world market. A discussion of institutional developments focuses on capital controls and the pursuit of macroeconomic polic...

Gross stocks of foreign assets have increased rapidly relative to national outputs since 1990, and the short-run capital gains and losses on those assets can amount to significant fractions of GDP. These fluctuations in asset values render the national income and product account measure of the current account balance increasingly inadequate as a su...

Prevalent thinking about liquidity traps suggests that the perfect substitutability of money and bonds at a zero short-term nominal interest rate renders open-market operations ineffective for achieving macroeconomic stabilization goals. In an earlier paper, we showed that this reasoning does not hold, that open-market operations can provide substa...

The interwar period was marked by the end of the classical gold standard regime and new levels of macroeconomic disorder in the world economy. The interwar disorder often is linked to policies inconsistent with the constraint of the openeconomy trilemma-the inability of policymakers simultaneously to pursue a fixed exchange rate, open capital marke...

Among the developing countries of the world, those emerging markets that have sought some degree of integration into the global financial system are characterized by higher per capita incomes, higher long-run growth rates, and lower output and consumption volatility. These characteristics are more likely to be causes than effects of financial integ...

This chapter surveys the development of international capital mobility since the mid-nineteenth century. It documents the long U traced out by the creation of a well-integrated global capital market by 1914, its collapse during the interwar years, and its resurrection since 1970. This description is enhanced by reference to the open-economy “trilem...

Prevalent thinking about liquidity traps suggests that the perfect substitutability of money and bonds at a zero short-term nominal interest rate renders open-market operations ineffective for achieving macroeconomic stabilization goals. We show that even were this the case, there remains a powerful argument for large-scale open market operations a...

This lecture presents a broad overview of postwar analytical thinking on international macroeconomics, culminating in a more detailed discussion of very recent progress. Along the way, it reviews important empirical evidence that has inspired alternative modeling approaches, as well as theoretical and policy considerations behind developments in th...

What determines sovereign risk? We study the London bond market from the 1870s to the 1930s. Our findings support conventional wisdom concerning the low credibility of the interwar gold standard. Before 1914 gold standard adherence effectively signalled credibility and shaved up to 30 basis points from country borrowing spreads. In the 1920s, howev...

Recently, the political economy of macroeconomic policy choice has increasingly been guided by the simple prescriptions of the classic trilemma. For example, policymakers often speak of the hollowing out of exchange rate regimes in a world of unstoppable capital mobility; and policy autonomy and a fixed nominal anchor present an unpleasant dichotom...

The ebb and flow of international capital since the nineteenth century illustrates recurring difficulties, as well as the alternative perspectives from which policymakers have tried to confront them. This paper is devoted to documenting these vicissitudes quantitatively and explaining them. Economic theory and economic history together can provide...

It is well-known that if international linkages are relatively small, the potential gains to international monetary policy coordination are typically quite limited. But when goods and financial markets are tightly linked, is it problematic if countries unilaterally design their monetary policy rules? Are the stabilization gains from having separate...

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...

This book presents an economic survey of international capital mobility from the late nineteenth century to the present. The authors examine the theory and empirical evidence surrounding the fall and rise of integration in the world market. A discussion of institutional developments focuses on capital controls and the pursuit of macroeconomic polic...

It is well known that if international linkages are relatively small, the potential gains to international monetary policy coordination are typically quite limited. What if, however, goods and financial markets are tightly linked? Is it then problematic if countries unilaterally design their institutions for monetary stabilization? Are the stabiliz...

Abstract : It is well known that if international linkages are relatively small, the potential gains to international monetary policy coordination are typically quite limited. But what if goods and financial markets are tightly linked? Is it then problematic if countries unilaterally design their institutions for monetary stabilization? Are the sta...

The central claim in this paper is that by explicitly introducing costs of international trade (narrowly, transport costs but more broadly, tariffs, nontariff barriers and other trade costs), one can go far toward explaining a great number of the main empirical puzzles that international macroeconomists have struggled with over twenty-five years. O...

Abstract : The US current account deficit has been persistently large and has brought the country's ratio of foreign debt to GDP to 20%, a figure that is high by historical standards. This paper argues that while US solvency is not a near-term constraint on ongoing deficits, the sheer size of the US economy makes it likely that its current account...

In recent years, many countries have instituted monetary reforms aimed at improving anti-inflation credibility. Is it a problem, however, that international welfare spillover effects seldom receive much consideration in the design of monetary reforms? Surprisingly, the answer may be no. Under plausible conditions, as domestic rules improve and inte...

The central claim in this paper is that by explicitly introducing costs of international trade (narrowly, transport costs but more broadly, tariffs, nontariff barriers and other trade costs), one can go far toward explaining a great number of the main empirical puzzles that international macroeconomists have struggled with over twenty-five years. O...

In this paper I focus on two specific hazard areas in the transition from Stage Two to Stage Three of European economic and monetary union (EMU), as well as on some key problems of Stage Three that EMU’s monetary and fiscal structures appear ill-prepared to handle. The transitional hazards are of considerable theoretical as well as policy interest:...

The paper develops a simple stochastic new open economy macroeconomic model based on sticky nominal wages. Explicit solution of the wage-setting problem under uncertainty allows one to analyze the effects of the monetary regime on welfare, expected output, and the expected terms of trade. Despite the potential interplay between imperfections due to...

The US current account deficit has been persistently large and has brought the country's ratio of foreign debt to GDP to 20%, a figure that is high by historical standards. This paper argues that while US solvency is not a near-term constraint on ongoing deficits, the sheer size of the US economy makes it likely that its current account will have t...

How will countries handle idiosyncratic national macroeconomic shocks under the European single currency? The ways in which European countries now react to internally asymmetric shocks provide a better forecast than do the regional response pattern of the United States. In this paper we compare the US with Germany, Italy, the United Kingdom, and al...

This paper surveys the evolution of international capital mobility since the late nineteenth century. We begin with an overview of empirical evidence on the fall and rise of integration in the global capital market. A discussion of institutional developments focuses on the use of capital controls and the pursuit of domestic macroeconomic policy obj...

This paper analyzes the constraints European Union law places on the 1 January 1999 choices of irrevocably fixed conversion rates between the Euro and the currencies of EMU members states. Current EU legislation, notably the Maastricht treaty, requires that the bilateral currency conversion factors implied by the 1 January 1999 choices equal closin...

This paper develops an explicitly stochastic new open economy macroeconomics' model, which can potentially be used to explore the qualitative and quantitative welfare differences between alternative exchange rate regimes. A crucial feature is that we do not simplify by assuming certainty equivalence for producer price setting behavior. Our framewor...

This paper surveys aspects of the empirical and theoretical debate over the effects of foreign resource inflows on the national saving, investment, and growth of developing countries. The paper suggests a methodology for systematically studying the effects of resource inflows, based on standard optimal growth models modified for consistency with ke...

We propose that analysis of purchasing power parity (PPP) and the law of one price (LOOP) should explicitly take into account the possibility of "commodity points"--thresholds delineating a region of no central tendency among relative prices, possibly due to lack of perfect arbitrage in the presence of transaction costs and uncertainty.

Asymmetric shocks Regional non-adjustment and fiscal policy How will countries handle idiosyncratic macroeconomic shocks under the single currency? Since the regional adjustment patterns currently prevailing within European currency unions are likely to prevail at the national level under the single currency, looking at the ways in which European c...

This paper studies policy rules with escape clauses, analyzing as an example fixed exchange rate systems that allow member countries the freedom to realign in periods of stress. While well-designed, escape-clause rules can raise society's welfare in principle, limited credibility makes it difficult to implement such rules in practice. An EMS-type i...

This paper reviews the theoretical functions, history, and policy problems raised by the international capital market. The goal is to offer a perspective on both the considerable advantages the market offers and on the genuine hazards it poses, as well as on avenues through which it constrains national policy choices. A duality of benefits and risk...

This paper views developments in open-economy macroeconomics through the lens of the debate over European monetary unification. The empirical tendency for nominal exchange rate regimes to affect the variability of nominal and real exchange rates alike can be rationalized by sticky-price theories or models of asset-market liquidity effects. But plau...

Both history and contemporary experience are replete with episodes of financial crisis leading to major output contractions. Predecessors of the current Asian crisis can be found in the interwar period as well as under the pre-World War I gold standard, although U.S. experience post-World War II is free so far of a recession initiated by widespread...

This paper develops an explicitly stochastic "new open economy macroeconomics" model, which can potentially by used to explore the qualitative and quantitative welfare differences between alternative exchange rate regimes.

The paper decomposes GDP both in terms of level per capita and growth rate, so as to identify the sources of income differences and of economic growth for all EU27 member states. This accounting approach has multiple advantages, although a number of substantial caveats should be borne in mind when interpreting the results. In particular, the detail...

This paper revises pre-World War II current account data for thirteen countries by treating gold flows on a consistent basis. The standard historical data sources often fail to distinguish between monetary gold exports, which are capital-account credits, and nonmonetary gold exports, which are current-account credits. The paper also adjusts histori...

Foundations of International Macroeconomics is an innovative text that offers the first integrative modern treatment of the core issues in open economy macroeconomics and finance. With its clear and accessible style, it is suitable for first-year graduate macroeconomics courses as well as graduate courses in international macroeconomics and finance...

The discomfort a government suffers from speculation against its currency determines the strategic incentives of speculators and the scope for multiple currency-market equilibria. After describing an illustrative model in which high unemployment may cause an exchange-rate crisis with self-fulfilling features, the paper reviews some other self-reinf...

This paper develops a dynamic model of seigniorage in which economies' equilibrium paths reflect the ongoing strategic interaction between an optimizing government and a rational public. The model extends existing positive models of monetary policy and inflation by explicitly incorporating the intertemporal linkages among budget deficits, debt, and...

We propose that analysis of purchasing power parity (PPP) and the law of one price (LOOP) should explicitly take into account the possibility of commodity points' thresholds delineating a region of no central tendency among relative prices, possibly due to lack of perfect arbitrage in the presence of transaction costs and uncertainty. More than eig...

Obstfeld, Maurice, and Taylor, Alan M.—Nonlinear Aspects of Goods-Market Arbitrage and Adjustment: Heckscher's Commodity Points Revisited We propose that analysis of purchasing power parity (PPP) and the law of one price should explicitly take into account the possibility of ''commodity points''—thresholds delineating a region of no central tendenc...

The intertemporal approach views the current-account balance as the outcome of forward-looking dynamic saving and investment decisions. This paper, a chapter in the forthcoming third volume of the Handbook of International Economics, surveys the theory and empirical work on the intertemporal approach as it has developed since the early 1980s. After...

The report argues that aid volatility is an important source of volatility for the poorest countries. Following a method already applied by the Agence Française de Développement, the report argues that loans to LICs should incorporate a floating grace period, which the country could draw upon when hit by a shock. The definition of a shock should in...

The authors develop an analytically tractable two-country model that marries a full account of global macroeconomic dynamics to a supply framework based on monopolistic competition and sticky nominal prices. The model offers simple and intuitive predictions about exchange rates and current accounts that sometimes differ sharply from those of either...

This paper discusses the profound difficulties of maintaining fixed exchange rates in a world of expanding global capital markets. Contrary to popular wisdom, industrialized-country monetary authorities easily have the resources to defend exchange parities against virtually any private speculative attack. But if their commitment to use those resour...

The asymptotic distributions of cointegration tests are approximated using the Gamma distribution. The tests considered are for the I(1), the conditional I(1), as well as the I(2) model. Formulae for the parameters of the Gamma distributions are derived from response surfaces. The resulting approximation is flexible, easy to implement and more accu...

The intertemporal approach views the current-account balance as the outcome of forward-looking dynamic saving and investment decisions. This paper, a chapter in the forthcoming third volume of the Handbook of International Economics, surveys the theory and empirical work on the intertemporal approach as it has developed since the early 1980s. After...

Once one recognizes that governments borrow international reserves and exercise other policy options to defend fixed exchange rates during currency crises, the question arises: What factors determine a government's decision to abandon a currency peg or hang on? In a setting of purposeful action by the authorities, the possibility of self-fulfilling...

This paper surveys the performance of international capital markets and the literature on measuring international capital mobility. Three main functions of a globally integrated and efficient world capital market provide focal points for the analysis. First, asset-price arbitrage ensures that people in different countries face identical prices for...

In dynamic stochastic welfare comparisons, a failure clearly to distinguish between risk aversion and intertemporal substitutability can result in misleading assessments of the impact of risk aversion on the welfare costs of consumption-risk changes. The problem arises in any setting in which uncertainty is propagated over time, notably, but not ex...

This paper develops a continuous-time stochastic model in which international risk-sharing can yield substantial welfare gains through its effect on expected consumption growth. The mechanism linking global diversification to growth is an attendant world portfolio shift from safe low-yield capital to riskier high-yield capital. The presence of thes...