Exchange-Rate Dynamics and Optimal Asset Accumulation Revisited / Maurice Obstfeld.

By:

Obstfeld, Maurice

Contributor(s):

National Bureau of Economic Research

Material type: Text

TextSeries: Technical Working Paper Series (National Bureau of Economic Research) ; no. t0064.Publication details: Cambridge, Mass. National Bureau of Economic Research 1988.Description: 1 online resource: illustrations (black and white)Online resources:

Available additional physical forms:

Hardcopy version available to institutional subscribers

Abstract: It has recently been observed that when equations of motion for state variables are nonautonomous, optimal control problems involving Uzawa's endogenous rate of time preference cannot be solved using the change-of-variables method common in the literature. Instead, the problem must be solved by explicitly adding an additional state variable that measures the motion of time preference over time. This note reassesses earlier work of my own on exchange rate dynamics, which was based on a change-of- variables solution procedure. When the correct two-state-variable solution procedure is used, the model's qualitative predictions are unchanged. In addition, the analysis yields an intuitive interpretation of the extra co-state variable that arises in solving the individual's maximization problem.

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Working Paper	Biblioteca Digital	Colección NBER	nber t0064 (Browse shelf(Opens below))	Not For Loan

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February 1988.

It has recently been observed that when equations of motion for state variables are nonautonomous, optimal control problems involving Uzawa's endogenous rate of time preference cannot be solved using the change-of-variables method common in the literature. Instead, the problem must be solved by explicitly adding an additional state variable that measures the motion of time preference over time. This note reassesses earlier work of my own on exchange rate dynamics, which was based on a change-of- variables solution procedure. When the correct two-state-variable solution procedure is used, the model's qualitative predictions are unchanged. In addition, the analysis yields an intuitive interpretation of the extra co-state variable that arises in solving the individual's maximization problem.