IDEAS home Printed from https://ideas.repec.org/p/nbr/nberwo/3088.html
   My bibliography  Save this paper

Financial Integration, Liquidity and Exchange Rates

Author

Listed:
  • Vittorio Grilli
  • Nouriel Roubini

Abstract

This paper presents a two-country extension of Lucas' (1988) work on the effects of cash-in-advance constraints in asset markets on the pricing of financial assets. The model is one where there exists some degree of separation between the goods markets and the asset markets and money is used for transactions in both markets. The main results of the paper are the following. First, the equilibrium level of the exchange rate depends on the share of money used for asset transactions: a greater share will correspond to a more appreciated exchange rate. Second, under uncertainty, liquidity effects deriving from stochastic shocks to bond creation lead to an "excess" volatility of nominal and real exchange rates even when the "fundamental" value of the exchange rate is constant. Third, capital controls in the form of taxes on foreign asset acquisitions tend to appreciate the exchange rate. Fourth, the maturity structure of the public debt affects the equilibrium exchange rate. In particular, a move towards a longer maturity structure will tend to depreciate the exchange rate.

Suggested Citation

  • Vittorio Grilli & Nouriel Roubini, 1989. "Financial Integration, Liquidity and Exchange Rates," NBER Working Papers 3088, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:3088
    Note: ITI IFM
    as

    Download full text from publisher

    File URL: http://www.nber.org/papers/w3088.pdf
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. Stockman, Alan C & Hernandez D, Alejandro, 1988. "Exchange Controls, Capital Controls, and International Financial Markets," American Economic Review, American Economic Association, vol. 78(3), pages 362-374, June.
    2. F. Giavazzi & M. Pagano, 1989. "Confidence Crises and Public Debt Management," Working Papers 73, Dipartimento Scienze Economiche, Universita' di Bologna.
    3. Helpman, Elhanan & Razin, Assaf, 1985. "Floating exchange rates with liquidity constraints in financial markets," Journal of International Economics, Elsevier, vol. 19(1-2), pages 99-117, August.
    4. Stockman, Alan C. & Svensson, Lars E. O., 1987. "Capital flows, investment, and exchange rates," Journal of Monetary Economics, Elsevier, vol. 19(2), pages 171-201, March.
    5. Svensson, Lars E O, 1988. "Trade in Risky Assets," American Economic Review, American Economic Association, vol. 78(3), pages 375-394, June.
    6. Svensson, Lars E. O., 1989. "Trade in nominal assets : Monetary policy, and price level and exchange rate risk," Journal of International Economics, Elsevier, vol. 26(1-2), pages 1-28, February.
    7. Helpman, Elhanan, 1981. "An Exploration in the Theory of Exchange-Rate Regimes," Journal of Political Economy, University of Chicago Press, vol. 89(5), pages 865-890, October.
    8. Rotemberg, Julio J, 1984. "A Monetary Equilibrium Model with Transactions Costs," Journal of Political Economy, University of Chicago Press, vol. 92(1), pages 40-58, February.
    9. Lucas, Robert E, Jr & Stokey, Nancy L, 1987. "Money and Interest in a Cash-in-Advance Economy," Econometrica, Econometric Society, vol. 55(3), pages 491-513, May.
    10. Grossman, Sanford & Weiss, Laurence, 1983. "A Transactions-Based Model of the Monetary Transmission Mechanism," American Economic Review, American Economic Association, vol. 73(5), pages 871-880, December.
    11. Jeremy Greenwood & Kent P. Kimbrough, 1987. "An Investigation in the Theory of Foreign Exchange Controls," Canadian Journal of Economics, Canadian Economics Association, vol. 20(2), pages 271-288, May.
    12. Lucas, Robert Jr., 1990. "Liquidity and interest rates," Journal of Economic Theory, Elsevier, vol. 50(2), pages 237-264, April.
    13. Hansson, Ingemar & Stuart, Charles, 1986. "The Fisher Hypothesis and International Capital Markets," Journal of Political Economy, University of Chicago Press, vol. 94(6), pages 1330-1337, December.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Helpman, Elhanan & Leiderman, Leonardo, 1991. "Exchange Rate Systems: New Perspectives," Foerder Institute for Economic Research Working Papers 275504, Tel-Aviv University > Foerder Institute for Economic Research.
    2. Ignazio Angeloni & Alessandro Prati, 1996. "The identification of liquidity effects in the EMS: Italy 1991–1992," Open Economies Review, Springer, vol. 7(3), pages 275-293, July.
    3. Alpo Willman, 1991. "Why there is a lower bound on the central bank's foreign reserves," Finnish Economic Papers, Finnish Economic Association, vol. 4(2), pages 113-129, Autumn.
    4. Grilli, Vittorio & Roubini, Nouriel, 1991. "Financial Intermediation and Monetary Policies in the World Economy," CEPR Discussion Papers 566, C.E.P.R. Discussion Papers.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:3088. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (). General contact details of provider: http://edirc.repec.org/data/nberrus.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.