Exchange rate indeterminacy in portfolio balance, Mundell-Fleming, and uncovered interest rate parity models
AbstractWith 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.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Schwartz Center for Economic Policy Analysis (SCEPA), The New School in its series SCEPA Working Papers with number 2000-21.
Length: 41 pages
Date of creation: Apr 2002
Date of revision:
exchange rate; Mundell-Fleming model;
Find related papers by 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
This paper has been announced in the following NEP Reports:
- NEP-ALL-2002-09-21 (All new papers)
- NEP-CBA-2002-09-21 (Central Banking)
- NEP-IFN-2002-09-21 (International Finance)
- NEP-PKE-2002-09-21 (Post Keynesian Economics)
You can help add them by filling out this form.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Bridget Fisher).
If references are entirely missing, you can add them using this form.