The conceptual framework for international macroeconomic policy analysis has evolved little over the past decade. The aggregative sticky-price model is still the dominant paradigm in policy circles world wide. It underpins the international macro- econometric models used by government agencies and international institutions. But even more importantly, the basic lessons of these models permeate all levels of policy discussion. While the shortcomings of these models have long been recognized, academic research has remained largely dormant. There have been significant advances in the study of flexible-price international macro models over this period, but thus far these models have had virtually no policy impact. It is understandable that policy makers are reluctant to ignore the familiar sticky-price models simply because they are out of fashion among theorists. The goal of this project is to incorporate new models of price rigidities into an explicitly intertemporal framework that can adequately account for the long and short run effects of current account imbalances, government fiscal deficits, and their impacts on other macroeconomic variables. The resulting analytical framework offers a fresh perspective on a broad range of international economic issues, including exchange rate overshooting, optimum currency areas, the fiscal-monetary mix, and strategic aspects of policy interdependence.
