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Stock Markets and Real Exchange Rate; An Intertemporal Approach

  • Benoît Mercereau

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.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 03/109.

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Length: 35
Date of creation: 01 May 2003
Date of revision:
Handle: RePEc:imf:imfwpa:03/109
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  1. 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.
  2. Benoît Mercereau, 2004. "The Role of Stock Markets in Current Account Dynamics; A Time Series Approach," IMF Working Papers 04/50, International Monetary Fund.
  3. 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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