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Portfolio Balance And Exchange Rate Stability

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  • Enders, Walter

Abstract

Much of the ongoing debate concerning the relative advantages of a fixed vs. a flexible exchange rate regime has centered around the stabilizing or destabilizing effects of speculation and the magnitudes of the elasticities of demand for foreign goods and services (1), Using a "small-country" model which implicitly ignored portfolio balance effects, Mundell (1960) added another dimension to the controversy by demonstrating that the stability properties of either type of exchange rate system depend upon the degree of capital mobility. In particu lar, Mundell shows that when capital is perfectly mobile internationally, a fixed exchange rate ensures a direct approach towards equilibrium while a flexible rate can produce a cyclical approach. In contrast, if capital is immobile, a flexible exchange rate ensures a direct approach towards equilibrium while a fixed rate makes a cyclical approach likely.

Suggested Citation

  • Enders, Walter, 1975. "Portfolio Balance And Exchange Rate Stability," ISU General Staff Papers 197503010700001005, Iowa State University, Department of Economics.
    • Handle: RePEc:isu:genstf:197503010700001005
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    References listed on IDEAS

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    1. Robert A. Mundell, 1960. "The Monetary Dynamics of International Adjustment under Fixed and Flexible Exchange Rates," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 74(2), pages 227-257.
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    1. Lapan, Harvey & Enders, Walter, 1976. "Capital Mobility and Devaluation in a Monetary Approach to the Balance of Payments," ISU General Staff Papers 197601010800001033, Iowa State University, Department of Economics.
    2. Enders, Walter, 1975. "Portfolio Balance and Balance of Payments Sterilization," ISU General Staff Papers 197510010700001020, Iowa State University, Department of Economics.

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