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Asset Markets, Exchange Rates and the Balance of Payments

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Author Info
Jacob A. Frenkel
Michael L. Mussa
Abstract

This paper, written as a chapter for a Handbook of International Economics, reviews developments in the theory of international monetary economics from the late 1960's through the early 1980's. Following a review of the operation of the monetary mechanism of balance of payments adjustment in the context of the Mundell-Fleming model, the paper reviews the more modern analysis of the dynamics of balance of payments adjustment under fixed exchange rates and of exchange rate determination under flexible exchange rates. Beginning with a simple exposition of the monetary mechanism, the model is then extended to incorporate sluggish wage and output adjustments, endogenous monetary policy and sterilization operations, multiplicity of tradable and nontradable goods, large countries, capital mobility and portfolio balance. The review then turns to an exposition of exchange rate theory, starting with the monetary approach to exchange rate determination. Issues discussed in this context include purchasing power parities, nontraded goods, the real exchange rate, currency substitution and the interaction between real and monetary factors in effecting exchange rates.The paper proceeds with a presentation of a more general framework that views the question of exchange rate determination as part of the general theory of the determination of asset prices, and which highlights the unique role of expectations. The general framework is then applied to characterize the interaction between the balance of payments and the equilibrium real exchange rate.The paper concludes with a brief discussion of some empirical issues of exchange rate analysis.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1287.

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Date of creation: Apr 1985
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Publication status: published as Frenkel, Jacob A. and Michael L. Mussa. "Asset Markets, Exchange Rates andthe Balance of Payments." Handbook of International Economics, Vol. II, edited by R.W. Jones and P.B. Kenen, pp. 679-747. Amsterdam: Elsevier Science Publishers B.V., (1985).
Handle: RePEc:nbr:nberwo:1287

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  1. S. Brock Blomberg, 2001. ""Dumb And Dumber" Explanations For Exchange Rate Dynamics," Journal of Applied Economics, Universidad del CEMA, vol. 0, pages 187-216, November. [Downloadable!]
  2. Devereux, Michael B & Engel, Charles M, 2006. "Expectations and Exchange Rate Policy," CEPR Discussion Papers 5743, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  3. Juan José Echavarría & Diego Vásquez & Mauricio Villamizar, . "La tasa de cambio Real en Colombia. ¿Muy Lejos del Equilibrio?," Borradores de Economia 337, Banco de la Republica de Colombia. [Downloadable!]
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  4. Athanasios Orphanides & Volker Wieland, 1999. "Efficient monetary policy design near price stability," Finance and Economics Discussion Series 1999-67, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
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  5. Bussolo, Maurizio & Molina, Luis & Lopez, Humberto, 2007. "Remittances and the real exchange rate," Policy Research Working Paper Series 4213, The World Bank. [Downloadable!]
  6. Charles Engel & Kenneth D. West, 2004. "Exchange Rates and Fundamentals," NBER Working Papers 10723, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  7. Broeck, Mark De & Sløk, Torsten, 2001. "Interpreting real exchange rate movements in transition countries," BOFIT Discussion Papers 7/2001, Bank of Finland, Institute for Economies in Transition. [Downloadable!]
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  8. Manuel Vega, . "Tipos de cambio flexibles, volatilidad y una nueva informacion: La nueva informacion como fuente de volatilidad," Studies on the Spanish Economy 139, FEDEA. [Downloadable!]
  9. Enrique Alberola & Susana G. Cervero & Humberto Lopez & Angel Ubide, 2000. "Global Equilibrium Exchange Rates: Euro, Dollar, "Ins," "Outs," and Other Major Currencies in a Panel Cointegration Framework," Econometric Society World Congress 2000 Contributed Papers 0051, Econometric Society. [Downloadable!]
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  10. Luis Viana, 1990. "Los Efectos de la Brecha Cambiaria sobre una Economía Pequeña y Abierta," Cuadernos de Economía (Latin American Journal of Economics), Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 27(80), pages 3-16. [Downloadable!]
  11. John Y. Campbell & Richard H. Clarida, 1988. "The Dollar and Real Interest Rates," NBER Working Papers 2151, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  12. Francisco Nadal De Simone, 1997. "Current account and exchange rate behaviour under inflation targeting in a small open economy," Reserve Bank of New Zealand Discussion Paper Series G97/4, Reserve Bank of New Zealand. [Downloadable!]
  13. Owen F. Humpage & Jean M. McIntire, 1995. "An introduction to currency boards," Economic Review, Federal Reserve Bank of Cleveland, issue Q II, pages 2-11. [Downloadable!]
  14. Tro Kortian, 1995. "Modern Approaches to Asset Price Formation: A Survey of Recent Theoretical Literature," RBA Research Discussion Papers rdp9501, Reserve Bank of Australia. [Downloadable!]
  15. Patricia Alonso-Gamo & Stefania Fabrizio & V. Kramarenko & Qing Wang, 2002. "Lithuania: History and Future of the Currency Board Arrangement:," IMF Working Papers 02/127, International Monetary Fund. [Downloadable!]
  16. Jacob A. Frenkel & Assaf Razin, 1989. "The Mundell-Flemming Model: A Quarter Century Later," NBER Working Papers 2321, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  17. Boštjan Jazbec, 2002. "Balassa-Samuelson Effect in Transition Economies: The Case of Slovenia," William Davidson Institute Working Papers Series 507, William Davidson Institute at the University of Michigan Stephen M. Ross Business School. [Downloadable!]
  18. W A Razzak & Thomas Grennes, 1998. "The long-run nominal exchange rate: specification and estimation issues," Reserve Bank of New Zealand Discussion Paper Series G98/5, Reserve Bank of New Zealand. [Downloadable!]
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