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Exchange rate indeterminacy in portfolio balance, Mundell-Fleming, and uncovered interest rate parity models

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Abstract

With full stock/flow accounting respected, the two-country open economy portfolio balance model has just two independent equations for asset market clearing. It can determine home and foreign interest rates but not the exchange rate. If asset market equilibria vary smoothly over time, the balance of payments equation in the Mundell-Fleming model is not independent and cannot set the exchange rate either. The familiar fixed reserves/"floating rate" vs. endogenous reserves/"fixed rate" dichotomy does not exist, and "fundamentals-based" econometric models of the exchange rate are bound to fail. An alternative is a two-country IS/LM model with exchange rate dynamics added. Its dynamic properties under uncovered interest rate parity are briefly explored.

Suggested Citation

  • Lance Taylor, 2002. "Exchange rate indeterminacy in portfolio balance, Mundell-Fleming, and uncovered interest rate parity models," SCEPA working paper series. 2000-21, Schwartz Center for Economic Policy Analysis (SCEPA), The New School.
    • Handle: RePEc:epa:cepawp:2000-21
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    Cited by:

    1. Yeldan Erinc A., 2008. "Prospects for Inflation Targeting in the MENA Region: Feasibility, Desirability and Alternatives," Review of Middle East Economics and Finance, De Gruyter, vol. 4(3), pages 83-100, September.
    2. Alberto Botta, 2014. "The Macroeconomics of a Financial Dutch Disease," DEM Working Papers Series 089, University of Pavia, Department of Economics and Management.
    3. repec:ilo:ilowps:467426 is not listed on IDEAS
    4. Carlos Eduardo Castillo-Maldonado & Fidel Pérez-Macal, 2013. "Assessment of models to forecast exchange rates: The quetzal–U.S. dollar exchange rate," Journal of Applied Economics, Universidad del CEMA, vol. 16, pages 71-99, May.
    5. Akinseye Olowu & Edwin Ijeoma & Annabel Vanroose, 2019. "The Nexus of Macroeconomic Policy and Entrepreneurship Performance in West Africa," Academic Journal of Interdisciplinary Studies, Richtmann Publishing Ltd, vol. 8, November.
    6. Anton Kuzmin, 2022. "Mathematical Exchange Rates Modeling: Equilibrium and Nonequilibrium Dynamics," Mathematics, MDPI, vol. 10(24), pages 1-19, December.
    7. Roberto Frenkel & Lance Taylor, 2006. "Real Exchange Rate, Monetary Policy and Employment," Working Papers 19, United Nations, Department of Economics and Social Affairs.
    8. Mickaël Clévenot & Yann Guy, 2007. "The inconsistency of French regulation mode faced with the financialization of accumulation pattern," Working Papers hal-00188614, HAL.
    9. Martín Rapetti, 2013. "The Real Exchange Rate and Economic Growth: Some Observations on the Possible Channels," UMASS Amherst Economics Working Papers 2013-11, University of Massachusetts Amherst, Department of Economics.
    10. Plakandaras, Vasilios & Papadimitriou, Theophilos & Gogas, Periklis, 2012. "Directional forecasting in financial time series using support vector machines: The USD/Euro exchange rate," DUTH Research Papers in Economics 5-2012, Democritus University of Thrace, Department of Economics.
    11. Yang‐Chao Wang & Jui‐Jung Tsai & Shushu Li & Yiying Huang, 2023. "The impacts of RMB internationalization on onshore and offshore RMB markets," International Review of Finance, International Review of Finance Ltd., vol. 23(3), pages 502-523, September.
    12. Yeldan, Erinc., 2011. "Macroeconomics of growth and employment : the case of Turkey," ILO Working Papers 994674263402676, International Labour Organization.
    13. Leonardo Vera, 2014. "The Simple Post-Keynesian Monetary Policy Model: An Open Economy Approach," Review of Political Economy, Taylor & Francis Journals, vol. 26(4), pages 526-548, October.
    14. Ghassan, Hassan B., 2007. "La condition de Marshall-Lerner-Robinson est-elle stable ? Approche par le test GLS cointégration à niveau et puissance améliorés [Does the Marshall-Lerner-Robinson condition verify the stability? ," MPRA Paper 56354, University Library of Munich, Germany, revised 15 Jan 2008.
    15. Arslan Razmi, 2018. "Does the demand regime matter over the medium run? Revisiting distributional issues in a portfolio framework under different exchange rate regimes," Metroeconomica, Wiley Blackwell, vol. 69(4), pages 708-736, November.
    16. Michalis Nikiforos & Gennaro Zezza, 2017. "Stock†Flow Consistent Macroeconomic Models: A Survey," Journal of Economic Surveys, Wiley Blackwell, vol. 31(5), pages 1204-1239, December.

    More about this item

    Keywords

    exchange rate; Mundell-Fleming model;

    JEL classification:

    • 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

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