Real exchange rate in an inter-temporal n-country-model with incomplete markets
AbstractWe develop an N-country model with stock markets in which closed-form solutions for the real exchange rate is derived. Our model allows for a given number of risky-assets, which form an incomplete market. Risky asset prices and allocations of risky assets among countries are determined endogenously. The risk-free rate is exogenous, so our model is an intermediate step toward a full general equilibrium. To work in such a framework allows an analysis of how fundamental parameters, such as the variance and covariance of the risky assets or demographic variables, affect the real exchange rate. We contrast the predictions of the model to the Balassa-Samuelson effect. We also suggest a new transmission channel of the real exchange rate for parameters such as income on net foreign assets, risk-aversion and risk-hedging opportunities. JEL Classification: F30, F31, F32, F41
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Bibliographic InfoPaper provided by European Central Bank in its series Working Paper Series with number 0205.
Date of creation: Jan 2003
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Find related papers by JEL classification:
- F30 - International Economics - - International Finance - - - General
- F31 - International Economics - - International Finance - - - Foreign Exchange
- F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
- F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262150476.
- Steven J. Davis & Jeremy Nalewaik & Paul Willen, 2000. "On the Gains to International Trade in Risky Financial Assets," NBER Working Papers 7796, National Bureau of Economic Research, Inc.
- Ascari, Guido & Rankin, Neil, 2007.
"Perpetual youth and endogenous labor supply: A problem and a possible solution,"
Journal of Macroeconomics,
Elsevier, vol. 29(4), pages 708-723, December.
- Ascari, Guido & Rankin, Neil, 2004. "Perpetual youth and endogenous labour supply: a problem and a possible solution," Working Paper Series 0346, European Central Bank.
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