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Stock Prices, Real Exchange Rates, and Optimal Capital Accumulation

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  • Robert G. Murphy

    (International Monetary Fund)

Abstract

The dynamics of the real exchange rate and the price of equity for a small open economy are analyzed using an optimizing model in which the process of capital accumulation entails adjustment costs. The analysis demonstrates how changes in fiscal policies or world interest rates can generate sustained movements in real exchange rates and equity prices simply because investment requires scarce resources. Interpreting such movements as evidence of market inefficiencies would be incorrect since adjustment is driven entirely by equilibrium in asset and goods markets. The results, however, do indicate that a stable and consistent set of fiscal policies can help reduce unnecessary volatility in real exchange rates and equity prices.

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Bibliographic Info

Article provided by Palgrave Macmillan in its journal Staff Papers - International Monetary Fund.

Volume (Year): 36 (1989)
Issue (Month): 1 (March)
Pages: 102-129

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Handle: RePEc:pal:imfstp:v:36:y:1989:i:1:p:102-129

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Cited by:
  1. Christoph Fischer, 2004. "Real currency appreciation in accession countries: Balassa-Samuelson and investment demand," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 140(2), pages 179-210, June.
  2. Philip L. Brock & Stephen J. Turnovsky, 1993. "The Dependent Economy Model with Both Traded and Non-Traded Capital Goods," NBER Working Papers 4500, National Bureau of Economic Research, Inc.
  3. Chang, Wen-ya & Lai, Ching-chong, 1997. "Election outcomes and the stockmarket: Further results," European Journal of Political Economy, Elsevier, vol. 13(1), pages 143-155, February.
  4. Serven, Luis, 1994. "Capital goods imports, the real exchange rate, and the current account," Policy Research Working Paper Series 1298, The World Bank.
  5. Hwan-Chyang Lin & Hui-Kuan Tseng, 1993. "Exchange rate shocks and the current account under monopolistic competition: An intertemporal optimization model," Open Economies Review, Springer, vol. 4(2), pages 133-150, June.
  6. Agiomirgianakis, George M. & Zervoyianni, Athina, 2001. "Economic growth, international labour mobility, and unanticipated non-monetary shocks," Journal of Policy Modeling, Elsevier, vol. 23(1), pages 1-16, January.

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