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Stochastic Equilibrium and Exchange Rate Determination in a Small Open Economy with Risk Averse Optimizing Agents

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Author Info
Earl L. Grinols
Stephen J. Turnovsky

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Abstract

This paper constructs a stochastic general equilibrium model of a small open economy consisting of risk averse optimizing agents. The stochastic processes describing the rate of monetary growth, government expenditure, private production, and the foreign price level are taken to be exogenous, determining all asset risks and returns, and the equilibrium stochastic processes describing the domestic inflation rate and the exchange rate. The model is used to examine a number of issues. These include: (i) the effects of the means and variances of policy shocks on the equilibrium; (ii) the determinants of the foreign exchange risk premium; (iii) the relationship between net export instability and economic growth.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3651.

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Date of creation: Mar 1991
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Publication status: published as Grinols, Earl L. and Stephen J. Turnovsky. "Exchange Rate Determination And Asset Prices In A Stochastic Small Open Economy," Journal of International Economics, 1994, v36(1/2), 75-97.
Handle: RePEc:nbr:nberwo:3651

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References listed on IDEAS
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.:
  1. Floyd, John E, 1978. " The Asset Market Theory of the Exchange Rate: A Comment," Scandinavian Journal of Economics, Blackwell Publishing, vol. 80(1), pages 100-103.
  2. Giovannini, Alberto & Jorion, Philippe, 1987. "Interest rates and risk premia in the stock market and in the foreign exchange market," Journal of International Money and Finance, Elsevier, vol. 6(1), pages 107-123, March. [Downloadable!] (restricted)
  3. Laidler, David E, 1977. "Expectations and the Behaviour of Prices and Output under Flexible Exchange Rates," Economica, London School of Economics and Political Science, vol. 44(176), pages 327-35, November. [Downloadable!] (restricted)
  4. Brock, Philip L., 1991. "Export instability and the economic performance of developing countries," Journal of Economic Dynamics and Control, Elsevier, vol. 15(1), pages 129-147. [Downloadable!] (restricted)
  5. Mehra, Rajnish & Prescott, Edward C., 1985. "The equity premium: A puzzle," Journal of Monetary Economics, Elsevier, vol. 15(2), pages 145-161, March. [Downloadable!] (restricted)
  6. Kenen, Peter B & Voivodas, Constantine S, 1972. "Export Instability and Economic Growth," Kyklos, Blackwell Publishing, vol. 25(4), pages 791-804.
  7. Alan C. Stockman & Lars E.O. Svensson, 1987. "Capital Flows, Investment, and Exchange Rates," NBER Working Papers 1598, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  1. Stephen J. Turnovsky & Marcelo Bianconi, 1993. "The International Transmission of Tax Policies in a Dynamic World Economy," NBER Working Papers 4086, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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