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Stock Markets and the Real Exchange Rate; An Intertemporal Approach

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  • Benoît Mercereau

Abstract

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.

Suggested Citation

  • Benoît Mercereau, 2003. "Stock Markets and the Real Exchange Rate; An Intertemporal Approach," IMF Working Papers 03/109, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:03/109
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    References listed on IDEAS

    as
    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. 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.
    3. 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, July.
    4. Benoît Mercereau, 2004. "The Role of Stock Markets in Current Account Dynamics; a Time-Series Approach," IMF Working Papers 04/50, International Monetary Fund.
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    Cited by:

    1. Ping Wang & Tomoe Moore, 2008. "Stock Market Integration For The Transition Economies: Time-Varying Conditional Correlation Approach," Manchester School, University of Manchester, vol. 76(s1), pages 116-133, September.

    More about this item

    Keywords

    Foreign exchange; Stock markets; Real exchange rate; risky assets; Balassa-Samuelson effect; exchange rate; hedging; International Finance: General; Open Economy Macroeconomics;

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