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Exchange Rates and Portfolio Balance

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  • John R. Martin
  • Paul R. Masson

Abstract

An open economy portfolio balance model, describing allocation among money, a domestic bond, and a traded foreign currency bond is developed for a world of many countries. A special role is attributed to the dollar, namely that all internationally traded bonds are denominated in that currency. It is shown that in the short run with real variables exogenous and expectations static, stability requires that all countries except the U.S. be net creditors in dollar-denominated bonds. What data are available on inter-country claims suggest that some countries may well be net debtors abroad in foreign currency. In particular, if one excludes direct investment claims, private claims on the rest of the world by Japan and Canada have been negative over the period of floating rates since 1973. However, some preliminary reduced-form regression equations for the dollar exchange rates of these two countries do not support the implications of the portfolio balance model in the debtor case. On the other hand, an equation for a composite of Western European currencies (by our calculations, this group of countries is a net creditor) gives more promising results.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 0377.

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Date of creation: Aug 1979
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Handle: RePEc:nbr:nberwo:0377

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References

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  1. Basevi, Giorgio & De Grauwe, Faul, 1977. "Vicious and virtuous circles: A theoretical analysis and a policy proposal for managing exchange rates," European Economic Review, Elsevier, Elsevier, vol. 10(3), pages 277-301.
  2. Basevi, G., 1973. "Balances of payments and exchange markets : A lost correspondence," European Economic Review, Elsevier, Elsevier, vol. 4(4), pages 309-328, December.
  3. Tobin, James, 1969. "A General Equilibrium Approach to Monetary Theory," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 1(1), pages 15-29, February.
  4. Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 84(6), pages 1161-76, December.
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Cited by:
  1. Peter Isard, 1980. "Factors determining exchange rates: the roles of relative price levels, balances of payments, interest rates and risk," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 171, Board of Governors of the Federal Reserve System (U.S.).
  2. Joseph Bisignano & Kevin Hoover, 1982. "Some suggested improvements to a simple portfolio balance model of exchange rate determination with special reference to the U. S. dollar/Canadian dollar rate," Review of World Economics (Weltwirtschaftliches Archiv), Springer, Springer, vol. 118(1), pages 19-38, March.
  3. Moura, Marcelo L. , & Lima, Adauto R. S. & Mendonça, Rodrigo M., 2008. "Exchange Rate and Fundamentals: The Case of Brazil," Insper Working Papers, Insper Working Paper, Insper Instituto de Ensino e Pesquisa wpe_114, Insper Working Paper, Insper Instituto de Ensino e Pesquisa.
  4. Maurice Obstfeld, 1982. "Exchange Rates, Inflation and the Sterilization Problem: Germany, 1975-1981," NBER Working Papers 0963, National Bureau of Economic Research, Inc.
  5. Peter Isard, 1980. "Factors determining exchange rates: the roles of relative price levels, balances of payments, interest rates and risk," BIS Working Papers 4, Bank for International Settlements.
  6. Tony Makin, 2007. "China's Rapid Growth, Yuan Misalignment and Global Imbalances," DEGIT Conference Papers, DEGIT, Dynamics, Economic Growth, and International Trade c012_012, DEGIT, Dynamics, Economic Growth, and International Trade.
  7. Moura, Marcelo L. & Lima, Adauto R. S., 2007. "Empirical exchange rate models fit: Evidence from the Brazilian economy," Insper Working Papers, Insper Working Paper, Insper Instituto de Ensino e Pesquisa wpe_87, Insper Working Paper, Insper Instituto de Ensino e Pesquisa.
  8. Peter Isard, 1982. "An accounting framework and some issues for modelling how exchange rates respond to the news," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 200, Board of Governors of the Federal Reserve System (U.S.).

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