IDEAS home Printed from https://ideas.repec.org/p/cpr/ceprdp/567.html
   My bibliography  Save this paper

Exchange Rate Risk and Imperfect Capital Mobility in an Optimizing Macromodel

Author

Listed:
  • Rankin, Neil

Abstract

A stochastic two-period model of a small open economy with optimizing consumption and portfolio choice is constructed. Exchange rate risk means domestic-currency bonds are imperfect substitutes for foreign-currency bonds. Expectations are rational, i.e. subjective probability distributions equal the true distributions resulting from the exogenous sources of uncertainty, which in this model are the foreign inflation rate and either the future money supply or government spending. With the former, no real risk premium exists, but increased monetary variance reduces current output, which nominal wage rigidity makes responsive to aggregate demand. With the latter source of uncertainty a premium exists, but neither the risk premium nor output is affected by an increased variance of government spending.

Suggested Citation

  • Rankin, Neil, 1991. "Exchange Rate Risk and Imperfect Capital Mobility in an Optimizing Macromodel," CEPR Discussion Papers 567, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:567
    as

    Download full text from publisher

    File URL: http://www.cepr.org/active/publications/discussion_papers/dp.php?dpno=567
    Download Restriction: CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cpr:ceprdp:567. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.