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

Benoît Mercereau

No 205, Working Paper Series from European Central Bank

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

Keywords: Balassa-Samuelson effect; real exchange rate; risky assets; stock markets (search for similar items in EconPapers)
Date: 2003-01
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
https://www.ecb.europa.eu//pub/pdf/scpwps/ecbwp205.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:2003205

Access Statistics for this paper

More papers in Working Paper Series from European Central Bank 60640 Frankfurt am Main, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Official Publications ().