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Portfolio Balance Model of Exchange Rate Behavior: A Peso-Dollar Example

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  • Ferdinand Nwafor

Abstract

This study investigates the Portfolio Balance Model (PBM) of exchange rate behavior in the context of the Mexican Peso and the US dollar for the period from 1985Q4 to 2005Q3. Tests of the reduced-form exchange rate equation and perfect substitution of domestic and foreign bonds are conducted utilizing the unit root and cointegration techniques that avoid residual autocorrelation problems, which have plagued previous tests of Portfolio Balance Model (PBM) of exchange rate determination in accordance with Branson et al. (1977) and Pearce (1983). Other things considered, the results show a weak evidence of a long-run relationship between the peso-dollar equilibrium exchange rate and the PBM fundamentals.

Suggested Citation

  • Ferdinand Nwafor, 2008. "Portfolio Balance Model of Exchange Rate Behavior: A Peso-Dollar Example," The IUP Journal of Financial Economics, IUP Publications, vol. 0(2), pages 41-47, June.
    • Handle: RePEc:icf:icfjfe:v:06:y:2008:i:2:p:41-47
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