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Exchange Rate Effects of Portfolio Shifts?

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Abstract

Using the Branson model as an example, this paper seeks to clarify the role of interest rate and exchange rate changes in asset market models. Focusing on short-term adjustments, it is shown that portfolio shifts mainly affect relative interest rates in different countries. Only to the extent that portfolio shifts lead to changes in the money demand or money supply, are exchange rates affected as well. The announcement of German monetary union in 1990 is used as an example to illustrate the relative significance of interest rate changes as shock absorbers.

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Bibliographic Info

Paper provided by University of Western Ontario, Department of Economics in its series UWO Department of Economics Working Papers with number 9818.

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Date of creation: Nov 1998
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Handle: RePEc:uwo:uwowop:9818

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Postal: Department of Economics, Reference Centre, Social Science Centre, University of Western Ontario, London, Ontario, Canada N6A 5C2
Phone: 519-661-2111 Ext.85244
Web page: http://economics.uwo.ca/research/research_papers/department_working_papers.html

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  1. William H. Branson, 1985. "The Dynamic Interaction of Exchange Rates and Trade Flows," NBER Working Papers 1780, National Bureau of Economic Research, Inc.
  2. Tobin, James, 1982. "Money and Finance in the Macroeconomic Process," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 14(2), pages 171-204, May.
  3. Malte Krüger, 1996. "Speculation, Hedging and Intermediation in the Foreign Exchange Market," Banco de Espa�a Working Papers 9606, Banco de Espa�a.
  4. Mark P. Taylor, 1995. "The Economics of Exchange Rates," Journal of Economic Literature, American Economic Association, vol. 33(1), pages 13-47, March.
  5. William H. Branson & Dale W. Henderson, 1984. "The Specification and Influence of Asset Markets," NBER Working Papers 1283, National Bureau of Economic Research, Inc.
  6. Girton, Lance & Roper, Don E, 1981. "Theory and Implications of Currency Substitution," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 13(1), pages 12-30, February.
  7. Branson, William H. & Halttunen, Hannu & Masson, Paul, 1977. "Exchange rates in the short run: The dollar-dentschemark rate," European Economic Review, Elsevier, vol. 10(3), pages 303-324.
  8. Michael L. Mussa, 1984. "The Theory of Exchange Rate Determination," NBER Chapters, in: Exchange Rate Theory and Practice, pages 13-78 National Bureau of Economic Research, Inc.
  9. Barro, Robert J. & Fischer, Stanley, 1976. "Recent developments in monetary theory," Journal of Monetary Economics, Elsevier, vol. 2(2), pages 133-167, April.
  10. James Tobin, 1956. "Liquidity Preference as Behavior Towards Risk," Cowles Foundation Discussion Papers 14, Cowles Foundation for Research in Economics, Yale University.
  11. Laidler, David, 1984. "The 'Buffer Stock' Notion in Monetary Economics," Economic Journal, Royal Economic Society, vol. 94(376a), pages 17-34, Supplemen.
  12. Calvo, Guillermo A & Rodriguez, Carlos Alfredo, 1977. "A Model of Exchange Rate Determination under Currency Substitution and Rational Expectations," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 617-25, June.
  13. Tobin, James, 1969. "A General Equilibrium Approach to Monetary Theory," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 1(1), pages 15-29, February.
  14. Hicks, J. R., 1979. "Critical Essays in Monetary Theory," OUP Catalogue, Oxford University Press, number 9780198284239, September.
  15. Robert Murphy & Carl Duyne, 1980. "Asset market approaches to exchange rate determination: A comparative analysis," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 116(4), pages 627-656, December.
  16. Chang, Winston W & Hamberg, Daniel & Hirata, Junichi, 1983. "Liquidity Preference as Behavior toward Risk Is a Demand for Short-Term Securities-Not Money," American Economic Review, American Economic Association, vol. 73(3), pages 420-27, June.
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