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Institutional investors and emerging markets with intermediate exchange rate regimes: A stock-flow consistent model

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  • Bonizzi, Bruno

Abstract

Abstract This paper develops a two-country stock-flow consistent model to analyse the relationship between advanced and emerging countries. The relationship between the two countries is asymmetric: advanced countries are characterised by an institutional investors’ sector which invests in both domestic and emerging markets assets, whereas emerging markets own advanced countries assets as a result of foreign exchange reserves accumulation by their central bank. The paper aims to show how the portfolio choice of institutional investors, which have return requirements to meet, is the key driver of financial stability in emerging markets, particularly by determining the dynamics of the exchange rates of emerging markets economies. Their role, compared to a standard open-economy model may be stabilising or de-stabilising, depending on the nature of the shock that induces changes in portfolio choices. The paper also shows how “intermediate” exchange rate regimes, as commonly found nowadays in the practice of emerging markets central banks, may be succesful at containing such instabilities.

Suggested Citation

  • Bonizzi, Bruno, 0017. "Institutional investors and emerging markets with intermediate exchange rate regimes: A stock-flow consistent model," MPRA Paper 67933, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:67933
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    File URL: https://mpra.ub.uni-muenchen.de/68103/1/MPRA_paper_67933.pdf
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    References listed on IDEAS

    as
    1. Tille, Cédric & van Wincoop, Eric, 2010. "International capital flows," Journal of International Economics, Elsevier, vol. 80(2), pages 157-175, March.
    2. Eugenio Caverzasi & Antoine Godin, 2015. "Post-Keynesian stock-flow-consistent modelling: a survey," Cambridge Journal of Economics, Oxford University Press, vol. 39(1), pages 157-187.
    3. Aizenman, Joshua & Chinn, Menzie D. & Ito, Hiro, 2010. "The emerging global financial architecture: Tracing and evaluating new patterns of the trilemma configuration," Journal of International Money and Finance, Elsevier, vol. 29(4), pages 615-641, June.
    4. Park, Donghyun & Estrada, Gemma, 2009. "Are Developing Asia’s Foreign Exchange Reserves Excessive? An Empirical Examination," ADB Economics Working Paper Series 170, Asian Development Bank.
    5. Atish R Ghosh & Jonathan D Ostry & Mahvash S Qureshi, 2015. "Exchange Rate Management and Crisis Susceptibility: A Reassessment," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 63(1), pages 238-276, May.
    6. Lane, Philip R. & Milesi-Ferretti, Gian Maria, 2007. "The external wealth of nations mark II: Revised and extended estimates of foreign assets and liabilities, 1970-2004," Journal of International Economics, Elsevier, vol. 73(2), pages 223-250, November.
    7. Jacques Mazier & Gnanonobodom Tiou‐Tagba Aliti, 2012. "World Imbalances And Macroeconomic Adjustments: A Three‐Country Stock‐Flow Consistent Model With Fixed Or Flexible Prices," Metroeconomica, Wiley Blackwell, vol. 63(2), pages 358-388, May.
    8. Marc Lavoie & Gauthier Daigle, 2011. "A Behavioural Finance Model Of Exchange Rate Expectations Within A Stock‐Flow Consistent Framework," Metroeconomica, Wiley Blackwell, vol. 62(3), pages 434-458, July.
    9. Pablo Gabriel Bortz, 2014. "Foreign debt, distribution, inflation, and growth in an SFC model," European Journal of Economics and Economic Policies: Intervention, Edward Elgar Publishing, vol. 11(3), pages 269-299, December.
    10. Devereux, Michael B. & Sutherland, Alan, 2009. "A portfolio model of capital flows to emerging markets," Journal of Development Economics, Elsevier, vol. 89(2), pages 181-193, July.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Institutional Investors; Emerging Markets; Stock-Flow Consistent Models; Exchange Rates;

    JEL classification:

    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • F30 - International Economics - - International Finance - - - General
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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