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Monetary Policy in a Portfolio Balance Model with Endogenous Physical Capital

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  • Habib Ahmed

    (National University of Singapore)

  • C. Paul Hallwood

    (University of Connecticut)

  • Stephen M. Miller

    (University of Connecticut)

Abstract

We develop a portfolio balance model with real capital accumulation. The introduction of real capital as an asset as well as a good produced and demanded by firms enriches extant portfolio balance models of exchange rate determination. We show that expansionary monetary policy causes exchange rate overshooting, not once, but twice; the secondary repercussion comes through the reaction of firms to changed asset prices and the firms' decisions to invest in real capital. The model sheds further light on the volatility of real and nominal exchange rates, and it suggests that changes in corporate sector profitability may affect exchange rates through portfolio diversification in corporate securities.

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File URL: http://www.econ.uconn.edu/working/1997-08.pdf
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Bibliographic Info

Paper provided by University of Connecticut, Department of Economics in its series Working papers with number 1997-08.

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Length: 24 pages
Date of creation: Jul 1997
Date of revision:
Handle: RePEc:uct:uconnp:1997-08

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  1. Frenkel, Jacob A & Rodriguez, Carlos Alfredo, 1975. "Portfolio Equilibrium and the Balance of Payments: A Monetary Approach," American Economic Review, American Economic Association, vol. 65(4), pages 674-88, September.
  2. Paul Hallwood & Ronald MacDonald, 2008. "International Money and Finance," Working papers 2008-02, University of Connecticut, Department of Economics.
  3. Rodriguez, Carlos Alfredo, 1980. "The Role of Trade Flows in Exchange Rate Determination: A Rational Expectations Approach," Journal of Political Economy, University of Chicago Press, vol. 88(6), pages 1148-58, December.
  4. Kouri, Pentti J K, 1976. " The Exchange Rate and the Balance of Payments in the Short Run and in the Long Run: A Monetary Approach," Scandinavian Journal of Economics, Wiley Blackwell, vol. 78(2), pages 280-304.
  5. Ruffin, Roy J, 1979. "Growth and the Long-Run Theory of International Capital Movements," American Economic Review, American Economic Association, vol. 69(5), pages 832-42, December.
  6. Meese, Richard A. & Rogoff, Kenneth, 1983. "Empirical exchange rate models of the seventies : Do they fit out of sample?," Journal of International Economics, Elsevier, vol. 14(1-2), pages 3-24, February.
  7. Pentti J.K. Kouri, 1978. "Balance of Payments and the Foreign Exchange Market: A Dynamic Partial Equilibrium Model," Cowles Foundation Discussion Papers 510, Cowles Foundation for Research in Economics, Yale University.
  8. Serven, Luis, 1994. "Capital goods imports, the real exchange rate, and the current account," Policy Research Working Paper Series 1298, The World Bank.
  9. James G. Witte & Jr., 1963. "The Microfoundations of the Social Investment Function," Journal of Political Economy, University of Chicago Press, vol. 71, pages 441.
  10. Dornbusch, Rudiger & Fischer, Stanley, 1980. "Exchange Rates and the Current Account," American Economic Review, American Economic Association, vol. 70(5), pages 960-71, December.
  11. Dooley, Michael & Isard, Peter, 1982. "A portfolio-balance rational-expectations model of the dollar-mark exchange rate," Journal of International Economics, Elsevier, vol. 12(3-4), pages 257-276, May.
  12. Frankel, Jeffrey A, 1979. "On the Mark: A Theory of Floating Exchange Rates Based on Real Interest Differentials," American Economic Review, American Economic Association, vol. 69(4), pages 610-22, September.
  13. Branson, William H. & Henderson, Dale W., 1985. "The specification and influence of asset markets," Handbook of International Economics, in: R. W. Jones & P. B. Kenen (ed.), Handbook of International Economics, edition 1, volume 2, chapter 15, pages 749-805 Elsevier.
  14. Hans Genberg & Henryk Kierzkowski, 1979. "Impact and long-run effects of economic disturbances in a dynamic model of exchange rate determination," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 115(4), pages 605-628, December.
  15. Polly Allen & Peter Kenen, 1976. "Portfolio adjustment in open economies: A comparison of alternative specifications," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 112(1), pages 33-72, March.
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