Asset Markets and Exchange Rates: Modeling an Open Economy by Polly Reynolds Allen

By Polly Reynolds Allen

This paperback version involves the 1st 3 components of Allen and Kenen's significant publication, Asset Markets, alternate premiums, and fiscal Integration. those 3 elements stand on my own, because the authors meant and as reviewers have commented. In elements 4 and 5 of that quantity they expand their version to 2 international locations buying and selling with the surface global and examine questions of monetary integration. The authors synthesize and expand contemporary advancements in overseas financial concept utilizing a common version of an open economic climate that trades items and resources with the skin international. The version embodies the asset marketplace or portfolio method of interpreting balance-of-payments adjustment. trade charges are made up our minds within the brief run by way of stipulations within the asset markets and in the end via stipulations within the items markets. the products markets contain an export stable, and import solid, and a nontradeable sturdy. Allen and Kenen convey that diversified assumptions in regards to the substitutability among items or among resources can generate a number of well known types as unique circumstances in their personal.

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Example text

38b). ) Impact effects in asset markets Differentiating totally Eqs. 43a) and using Eqs. 2 These are the equations we require to solve for asset-market responses to financial disturbances, but we must do so separately for flexible and pegged exchange rates. The flexible-rate case. When the exchange rate is flexible, 8TT is endogenous and 8R is zero; the central bank does not intervene in the foreign-exchange market, and its holdings of reserves do not change. 1a) = I" ! the currency value of the foreign bond brought about by a change in the exchange rate.

23 Saving depends on the interest rates, disposable income, and wealth. But disposable income is a function of gross domestic product and three policy-determined variables, as shown by Eq. 3a) Y = pN6N(pN, h Px) + PxdxipN, p^ Furthermore, W and W can be treated as functions of Whs and TT, using 22 23 c These are the variables listed in Section I of the Glossary. See Appendix A. 44 Modeling an open economy Eqs. 34). Therefore, the four market-clearing equations can be solved for four market-clearing variables, pl, pN, r1?

9 We can replicate results obtained from models of this type by assuming that the two traded goods are perfect substitutes at home or abroad; the terms of trade are then fixed, so that the only endogenous price changes involve the composite traded good and the nontraded good. Having listed ways in which our model is general, we must also emphasize ways in which it is quite special. 10 Later in this book, moreover, the number of countries is doubled, and we have to solve larger numbers of equations.

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