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An Intertemporal Model of the Real Exchange Rate, Stock Market, and International Debt Dynamics: Policy Simulations

Author

Listed:
  • Saziye Gazioglu

    (Department of Economics, University of Aberdeen, Edward Wright Building, Old Aberdeen, AB24 3QY)

  • W. David McCausland

    (Department of Economics, University of Aberdeen, Edward Wright Building, Old Aberdeen, AB24 3QY)

Abstract

This paper develops an open economy intertemporal optimising model that seeks to analyse the effect of bill financed government expenditure on several key financial markets. The main results suggest that an increase in bill financed government expenditure leads to a rise in net international debt, a fall in domestic the real exchange rate and a fall in the stock market value. Furthermore, due to the presence of non-linearities in the model, reversing the deficit financing policy doesn’t restore the initial net international credit, high stock market value state. Instead, the country finds itself stuck in an international debt and low stock market value trap.

Suggested Citation

  • Saziye Gazioglu & W. David McCausland, 2004. "An Intertemporal Model of the Real Exchange Rate, Stock Market, and International Debt Dynamics: Policy Simulations," Ekonomia, Cyprus Economic Society and University of Cyprus, vol. 7(2), pages 73-88, Winter.
  • Handle: RePEc:ekn:ekonom:v:7:y:2004:i:2:p:73-88
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    More about this item

    JEL classification:

    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
    • F40 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - General
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • H60 - Public Economics - - National Budget, Deficit, and Debt - - - General

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