Stock Markets and the Real Exchange Rate; An Intertemporal Approach
The paper presents an N-country model with stock markets, in which a closed-form solution for the real exchange rate is derived. Risky asset prices and allocation of risky assets among countries are determined endogenously. Such a framework allows an analysis of how fundamental parameters, such as the variance and covariance of the risky assets or demographic variables, affect the real exchange rate. The predictions of the model are contrasted with the Balassa-Samuelson effect. A new transmission channel of the real exchange rate for parameters such as income on net foreign assets, risk aversion, and risk-hedging opportunities is also explored.
|Date of creation:||01 May 2003|
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- Paul Willen, 2005. "New financial markets: who gains and who loses," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 26(1), pages 141-166, 07.
- Mercereau Benoit, 2003. "The Role of Stock Markets in Current Account Dynamics: a Time Series Approach," The B.E. Journal of Macroeconomics, De Gruyter, vol. 3(1), pages 1-30, April.
- BenoÃ®t Mercereau, 2004. "The Role of Stock Markets in Current Account Dynamics; a Time-Series Approach," IMF Working Papers 04/50, International Monetary Fund.
- Steven J. Davis & Jeremy Nalewaik & Paul Willen, 2000. "On the Gains to International Trade in Risky Financial Assets," NBER Working Papers 7796, National Bureau of Economic Research, Inc.
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