The purpose of this paper is to construct a two-period, two-country model that derives the current account, the exchange rate, the terms of trade, and real interest rates from optimal behavior principles. This is done by constructing a model that uses money mainly as a means of exchange, where the technology of exchange is flexible due to potential substitutability of time and real balances as a means of coordinating transactions. The discussion results in a framework that integrates elements of net saving theories and the monetary approach into a unified structure, in which the two approaches are complementary viewpoints.
ASJC Scopus subject areas
- Economics and Econometrics