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Real exchange rate in an inter-temporal n-country-model with incomplete markets

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  • Mercereau, Benoît

Abstract

We develop an N-country model with stock markets in which closed-form solutions for the real exchange rate is derived. Our model allows for a given number of risky-assets, which form an incomplete market. Risky asset prices and allocations of risky assets among countries are determined endogenously. The risk-free rate is exogenous, so our model is an intermediate step toward a full general equilibrium. To work in such a framework allows an analysis of how fundamental parameters, such as the variance and covariance of the risky assets or demographic variables, affect the real exchange rate. We contrast the predictions of the model to the Balassa-Samuelson effect. We also suggest a new transmission channel of the real exchange rate for parameters such as income on net foreign assets, risk-aversion and risk-hedging opportunities. JEL Classification: F30, F31, F32, F41

Suggested Citation

  • Mercereau, Benoît, 2003. "Real exchange rate in an inter-temporal n-country-model with incomplete markets," Working Paper Series 205, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:2003205
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    References listed on IDEAS

    as
    1. Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262150476, April.
    2. Steven J. Davis & Jeremy Nalewaik & Paul Willen, 2000. "On the Gains to International Trade in Risky Financial Assets," NBER Working Papers 7796, National Bureau of Economic Research, Inc.
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    Cited by:

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    2. Eita, Joel Hinaunye & Khumalo, Zitsile Zamantungwa & Choga, Ireen, 2020. "Empirical test of the Balassa-Samuelson effect in selected African countries," MPRA Paper 101495, University Library of Munich, Germany.

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    More about this item

    Keywords

    Balassa-Samuelson effect; real exchange rate; risky assets; stock markets;
    All these keywords.

    JEL classification:

    • F30 - International Economics - - International Finance - - - General
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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