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Influence of Fiscal Shocks on Exchange Rate Volatility under Imperfect Capital Mobility and Asset Substitutability

In: Open-Economy Macroeconomics

Author

Listed:
  • Şaziye Gazioḡlu

    (University of Aberdeen)

Abstract

A considerable literature on flexible exchange rates has developed, notably Dornbusch, (1976); Niehans (1977); Hooper and Morton (1982); Bhandari, Driskill and Frenkel (1984); and Gazioglu (1984), based on Dornbusch’s model using capital mobility and asset substitutability synonymously. The findings of these papers indicate that high capital mobility increases the possibility of foreign exchange overshooting, while low capital mobility increases the possibility of undershooting of the exchange rate, in response to an unanticipated money supply increase. Gazioglu (1984) and Bhandari, Driskill and Frenkel (1984) have confirmed that the results are robust, whether capital mobility is considered as a flow, or a stock view of capital movements is adopted. The flow view implies a link between the current account and the capital account in every period. The stock view of capital movements is a step towards a portfolio view of the balance of payments. Hooper and Morton (1982), Artis and Gazioglu (1989; 1991) have also incorporated the current account balance in their models.

Suggested Citation

  • Şaziye Gazioḡlu, 1993. "Influence of Fiscal Shocks on Exchange Rate Volatility under Imperfect Capital Mobility and Asset Substitutability," International Economic Association Series, in: Helmut Frisch & Andreas Wörgötter (ed.), Open-Economy Macroeconomics, chapter 9, pages 167-185, Palgrave Macmillan.
    • Handle: RePEc:pal:intecp:978-1-349-12884-6_9
    DOI: 10.1007/978-1-349-12884-6_9
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