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Exchange rate dynamics in economies with portfolio rigidities

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  • Beatriz de-Blas-Pérez

    () (Universidad de Navarra)

Abstract

This paper analyzes the international monetary transmission mechanism in economies with portfolio rigidities. In a general equilibrium monetary model with distribution costs in trade, I analyze the reaction of the economy to technology, money supply and government spending shocks, and the ability of the model to account for some stylized facts of international business cycles. The main focus is on interest rate and exchange rate dynamics. In contrast to most limited participation models, the specification employed in this paper is able to replicate the liquidity effect and the effect of money shocks on international interest rates spreads. It also reports both a nominal and real depreciation of the domestic currency after a money injection, as observed in the data. Quantitatively, the model does relatively well in matching some business cycle moments but fails to generate the high volatility and correlations of exchange rates observed in the data.

Suggested Citation

  • Beatriz de-Blas-Pérez, 2005. "Exchange rate dynamics in economies with portfolio rigidities," Working Papers 0532, Banco de España;Working Papers Homepage.
  • Handle: RePEc:bde:wpaper:0532
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    Cited by:

    1. Kodongo, Odongo & Ojah, Kalu, 2012. "The dynamic relation between foreign exchange rates and international portfolio flows: Evidence from Africa's capital markets," International Review of Economics & Finance, Elsevier, vol. 24(C), pages 71-87.
    2. de Blas, Beatriz, 2008. "International Transmission of Shocks under Financial Frictions: Some Implications for International Business Cycle Comovement," Working Papers in Economic Theory 2008/01, Universidad Autónoma de Madrid (Spain), Department of Economic Analysis (Economic Theory and Economic History).
    3. Kitano, Shigeto & Takaku, Kenya, 2013. "An optimal government spending reversal rule in a small open economy," International Review of Economics & Finance, Elsevier, vol. 27(C), pages 374-382.

    More about this item

    Keywords

    flexible prices; distribution costs; exchange rate dynamics;

    JEL classification:

    • F10 - International Economics - - Trade - - - General
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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