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The Portfolio Balance Approach to Exchange Rate Determination

In: The Economics of Foreign Exchange and Global Finance

Author

Listed:
  • Peijie Wang

    (University of Hull, Business School)

Abstract

Monetary approaches to exchange rate determination, including the flexible price monetary model proposed by Frenkel (1976) and sticky price monetary model by Dornbusch (1976), assume that uncovered interest rate parity (UIRP) holds. This assumption implies that domestic and foreign assets are perfect substitutes, which the portfolio balance approach unequivocally deviates. The deviation arises from, among others, from different risk attitudes towards foreign financial assets in relation to domestic financial assets; or there exists a risk premium on holding foreign financial assets relative to holding domestic financial assets. Moreover and in contrast to the monetary models, foreign exchange rates are not expected to change, or exchange rate expectations are static with the portfolio balance approach.

Suggested Citation

  • Peijie Wang, 2009. "The Portfolio Balance Approach to Exchange Rate Determination," Springer Books, in: The Economics of Foreign Exchange and Global Finance, chapter 10, pages 1-25, Springer.
    • Handle: RePEc:spr:sprchp:978-3-642-00100-0_10
    DOI: 10.1007/978-3-642-00100-0_10
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    Citations

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    Cited by:

    1. Ferry Syarifuddin, 2020. "Macroeconomic Consequences Of Foreign Exchange Futures," Working Papers WP/14/2020, Bank Indonesia.
    2. Biagio Bossone, 2022. "A Modigliani-Miller Theorem for the Public Finances of Globalized Economies: Theory, Policy Implications, and Keynesian Reflections," Working Papers PKWP2202, Post Keynesian Economics Society (PKES).
    3. Bossone, Biagio, 2024. "A Modigliani-Miller theorem for the public finances of globalized economies," International Review of Financial Analysis, Elsevier, vol. 94(C).
    4. Bossone, Biagio, 2019. "The portfolio theory of inflation (and policy effectiveness)," Economics Discussion Papers 2019-29, Kiel Institute for the World Economy (IfW Kiel).
    5. Ioannis N. Kallianiotis, 2021. "Exchange Rate Determination: The Portfolio-Balance Approach," Journal of Applied Finance & Banking, SCIENPRESS Ltd, vol. 11(1), pages 1-2.
    6. Bossone, Biagio, 2019. "The portfolio theory of inflation and policy (in)effectiveness," Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), Kiel Institute for the World Economy (IfW Kiel), vol. 13, pages 1-25.

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