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Stochastic Equilibrium and Exchange Rate Determination a Small Open Economy with Risk Averse Optimizing Agents

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  • Grinols, E.
  • Turnovsky, S.J.

Abstract

This paper constructs a stochastic general equilibrium model of a small open economy consisting of risk averse optimizing agents. The stochastic processes describing the rate of monetary growth, government expenditure, private production, and the foreign price level are taken to be exogenous, determining all asset risks and returns, and the equilibrium stochastic processes describing the domestic inflation rate and the exchange rate. The model is used to examine a number of issues. These include: (i) the effects of the means and variances of policy shocks on the equilibrium; (ii) the determinants of the foreign exchange risk premium; (iii) the relationship between net export instability and economic growth.
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Suggested Citation

  • Grinols, E. & Turnovsky, S.J., 1991. "Stochastic Equilibrium and Exchange Rate Determination a Small Open Economy with Risk Averse Optimizing Agents," Discussion Papers in Economics at the University of Washington 91-21, Department of Economics at the University of Washington.
    • Handle: RePEc:fth:washer:91-21
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    Cited by:

    1. Antoine Magnier, 1992. "Théorie des zones cibles et fonctionnement du SME," Économie et Prévision, Programme National Persée, vol. 104(3), pages 87-113.
    2. Turnovsky, Stephen J & Bianconi, Marcelo, 1992. "The International Transmission of Tax Policies in a Dynamic World Economy," Review of International Economics, Wiley Blackwell, vol. 1(1), pages 49-72, November.
    3. Bianconi, Marcelo, 1995. "Fiscal policy in a simple two-country dynamic model," Journal of Economic Dynamics and Control, Elsevier, vol. 19(1-2), pages 395-419.

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