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Interest Rate Parity and Imperfect Substitutability

In: Exchange Rates, Money and Output

Author

Listed:
  • Paul Grauwe

    (Catholic University of Leuven)

  • Michele Fratianni

    (Indiana University)

  • Mustapha K. Nabli

    (University of Tunis)

Abstract

This chapter is intended to motivate and justify the strategy adopted in Part II; namely, modelling exchange rates within a portfolio-balance framework rather than relying on a monetary approach. The latter, by taking domestic and foreign assets as perfect substitutes, emphasises only one asset, money. In contrast, by removing the perfect substitutability assumption, the portfolio-balance approach allows current-account imbalances to affect the exchange rate via changes in the world distribution of assets denominated in different monies. The structure and implications of this view of the world are discussed in detail in Chapter 5. We leave to this chapter the presentation of evidential material supporting our choice of models.

Suggested Citation

  • Paul Grauwe & Michele Fratianni & Mustapha K. Nabli, 1985. "Interest Rate Parity and Imperfect Substitutability," Palgrave Macmillan Books, in: Exchange Rates, Money and Output, chapter 4, pages 53-69, Palgrave Macmillan.
    • Handle: RePEc:pal:palchp:978-1-349-17699-1_4
    DOI: 10.1007/978-1-349-17699-1_4
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