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An Equilibrium Model of Exchange Rate Determination and Asset Pricing with Nontraded Goods and Imperfect Information

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Author Info
Stulz, Rene M

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Abstract

This paper presents a two-country model with maximizing households, stochastic production, stochastic money growth, and perfect capital mobility. Because of the presence of nontraded goods, households in different countries consume different goods. Analytic solutions are presented for the nominal exchange rate, the real exchange rate, nominal interest rates, and real interest rates. It is shown that the model is compatible with some important features of the real-world behavior of exchange rates. When households are imperfectly informed about the distribution of money growth, the exchange rate exhibits patterns of overshooting and is more volatile than the ratio of the money stocks. Copyright 1987 by University of Chicago Press.

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Publisher Info
Article provided by University of Chicago Press in its journal Journal of Political Economy.

Volume (Year): 95 (1987)
Issue (Month): 5 (October)
Pages: 1024-40
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Handle: RePEc:ucp:jpolec:v:95:y:1987:i:5:p:1024-40

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  1. Apte, Prakesh & Sercu, Piet & Uppal, Raman, 2002. "The Exchange Rate and Purchasing Power Parity: Extending the Theory and Tests," CEPR Discussion Papers 3343, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  2. Jonathan Lewellen & Jay Shanken, 2000. "Estimation Risk, Market Efficiency, and the Predictability of Returns," NBER Working Papers 7699, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  3. Michael Kumhof & Stijn van Nieuwerburgh, 2007. "Monetary Policy in an Equilibrium Portfolio Balance Model," IMF Working Papers 07/72, International Monetary Fund. [Downloadable!]
    Other versions:
  4. Bhagwan Chowdhry & Sheridan Titman, 1993. "Why Real Interest Rates, Cost of Capital and Price/Earnings Ratios Vary Across Countries," University of California at Los Angeles, Anderson Graduate School of Management 1157, Anderson Graduate School of Management, UCLA. [Downloadable!]
    Other versions:
  5. Rene M. Stulz, 1994. "International Portfolio Choice and Asset Pricing: An Integrative Survey," NBER Working Papers 4645, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  6. THOMAS C. CHIANG & JOSÉ A. TRINIDAD, 1997. "Risk And International Parity Conditions: A Synthesis From Consumption-Based Models," International Economic Journal, Korean International Economic Association, vol. 11(2), pages 73-101, June. [Downloadable!] (restricted)
  7. Prakash Apte & Piet Sercu & Raman Uppal, 1996. "The Equilibrium Approach to Exchange Rates: Theory and Tests," NBER Working Papers 5748, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  8. Ross Levine, 1988. "The forward exchange rate bias: a new explanation," International Finance Discussion Papers 338, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  9. Maurice Obstfeld, 1992. "Risk-taking, global diversification, and growth," Discussion Paper / Institute for Empirical Macroeconomics 61, Federal Reserve Bank of Minneapolis. [Downloadable!]
    Other versions:
  10. Ciprian Necula, 2008. "A Two-Country Discontinuous General Equilibrium Model," Advances in Economic and Financial Research - DOFIN Working Paper Series 23, Bucharest University of Economics, Center for Advanced Research in Finance and Banking - CARFIB. [Downloadable!]
  11. Jyh-Lin Wu, 1995. "Real Exchange Rates With Endogenous Growth: A Parametric Example," International Economic Journal, Korean International Economic Association, vol. 9(3), pages 81-87, October. [Downloadable!] (restricted)
  12. Yihong Xia, 2000. "Learning About Predictability: The Effects of Parameter Uncertainty on Dynamic Asset Allocation," University of California at Los Angeles, Anderson Graduate School of Management 1057, Anderson Graduate School of Management, UCLA. [Downloadable!]
  13. Rui Albuquerque, 2004. "The Forward Premium Puzzle in a Model of Imperfect Information: Theory and Evidence," International Finance 0405007, EconWPA. [Downloadable!]
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