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Balance of Payments and the Foreign Exchange Market: A Dynamic Partial Equilibrium Model

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  • Pentti J.K. Kouri

Abstract

This paper develops a dynamic partial equilibrium model of the foreign exchange market extending the standard textbook model in two respects. First, capital account transactions are explicitly incorporated into the model, and secondly, 'rational' speculative behaviour is also introduced. At a point in time, or in a given day, exchange rate fluctuations are dominated by 'new information' that leads to revision of speculative expectations, as well as by other disturbances on the capital account. In the long run, fundamental factors, such as divergences of inflation rates and real changes influencing the trade balance, become relevant in determining the 'trend' of the exchange rate. A variety of exercises, and numerical simulations, illustrate the usefulness of the dynamic supply-demand model in understanding the behaviour of floating exchange rates in a world of high capital mobility.

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  • Pentti J.K. Kouri, 1981. "Balance of Payments and the Foreign Exchange Market: A Dynamic Partial Equilibrium Model," NBER Working Papers 0644, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:0644
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    Cited by:

    1. John A. Carlson & Carol L. Osler, 1996. "Rational speculators and exchange rate volatility," Staff Reports 13, Federal Reserve Bank of New York.
    2. Goldberg, Linda S. & Krogstrup, Signe, 2023. "International capital flow pressures and global factors," Journal of International Economics, Elsevier, vol. 146(C).
    3. Jean-Baptiste Gossé, 2009. "The Real and Financial Implications of the Global Saving Glut: A Three-Country Model," Working Papers hal-00380417, HAL.
    4. Jane K. Dokko & Benjamin J. Keys & Lindsay E. Relihan, 2019. "Affordability, financial innovation and the start of the housing boom," CEP Discussion Papers dp1611, Centre for Economic Performance, LSE.
    5. Kuersteiner, Guido M. & Phillips, David C. & Villamizar-Villegas, Mauricio, 2018. "Effective sterilized foreign exchange intervention? Evidence from a rule-based policy," Journal of International Economics, Elsevier, vol. 113(C), pages 118-138.
    6. Linda S. Goldberg & Signe Krogstrup, 2018. "International Capital Flow Pressures," NBER Working Papers 24286, National Bureau of Economic Research, Inc.
    7. Perez-Reyna, David & Villamizar-Villegas, Mauricio, 2019. "Exchange rate effects of financial regulations," Journal of International Money and Finance, Elsevier, vol. 96(C), pages 228-245.
    8. Benigno, Gianluca & Fornaro, Luca & Wolf, Martin, 2022. "Reserve accumulation, growth and financial crises," Journal of International Economics, Elsevier, vol. 139(C).
    9. Laura Andrade-Pardo & Oscar Valencia-Arana & Diego Vásquez-Escobar & Mauricio Villamizar-Villegas, 2016. "Uncovering the portfolio balance channel with the use of sovereign credit ratings," Revista ESPE - Ensayos Sobre Política Económica, Banco de la República, vol. 34(81), pages 191-205, November.
    10. Jacques Mélitz, 1982. "Jusqu'à quel point doit-on simplifier la modélisation du taux de change ?," Revue Économique, Programme National Persée, vol. 33(4), pages 675-694.

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