Interest Rate Parity and Imperfect Substitutability

Paul Grauwe, Michele Fratianni and Mustapha K. Nabli
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Paul Grauwe: Catholic University of Leuven
Mustapha K. Nabli: University of Tunis

Chapter 4 in Exchange Rates, Money and Output, 1985, pp 53-69 from Palgrave Macmillan

Abstract: Abstract This chapter is intended to motivate and justify the strategy adopted in Part II; namely, modelling exchange rates within a portfolio-balance framework rather than relying on a monetary approach. The latter, by taking domestic and foreign assets as perfect substitutes, emphasises only one asset, money. In contrast, by removing the perfect substitutability assumption, the portfolio-balance approach allows current-account imbalances to affect the exchange rate via changes in the world distribution of assets denominated in different monies. The structure and implications of this view of the world are discussed in detail in Chapter 5. We leave to this chapter the presentation of evidential material supporting our choice of models.

Keywords: Exchange Rate; Interest Rate; Transaction Cost; Risk Premium; Foreign Asset (search for similar items in EconPapers)
Date: 1985
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DOI: 10.1007/978-1-349-17699-1_4

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