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Exchange rates and different degrees of capital market integration: A monetary approach to the Mark/Dollar rate

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  • König, Peter

Abstract

In the political discussion, exchange rates are often said to be overvalued or undervalued. This is due to the fact that exchange rates have to fulfill a (more than) dual role: they have to balance international goods markets and international capital markets. In general, economic models try to handle this problem by introducing short-term overshooting effects of the exchange rate induced by monetary disturbances. Yet, especially in estimating these models, a fixed relationship between asset markets and goods markets is assumed: the adjustment speed of the actual overshooting exchange rate to its long-run level is kept constant over time. In this paper, we introduce a time-varying index for capital market integration via expectation formation in the context of a monetary approach to the exchange rate with sticky prices.

Suggested Citation

  • König, Peter, 1986. "Exchange rates and different degrees of capital market integration: A monetary approach to the Mark/Dollar rate," Discussion Papers, Series I 219, University of Konstanz, Department of Economics.
    • Handle: RePEc:zbw:kondp1:219
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    References listed on IDEAS

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    1. Frenkel, Jacob A, 1976. " A Monetary Approach to the Exchange Rate: Doctrinal Aspects and Empirical Evidence," Scandinavian Journal of Economics, Wiley Blackwell, vol. 78(2), pages 200-224.
    2. Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1161-1176, December.
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