Exchange Rate Risk and Imperfect Capital Mobility in an Optimizing Macromodel

Neil Rankin

No 567, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: A stochastic two-period model of a small open economy with optimizing consumption and portfolio choice is constructed. Exchange rate risk means domestic-currency bonds are imperfect substitutes for foreign-currency bonds. Expectations are rational, i.e. subjective probability distributions equal the true distributions resulting from the exogenous sources of uncertainty, which in this model are the foreign inflation rate and either the future money supply or government spending. With the former, no real risk premium exists, but increased monetary variance reduces current output, which nominal wage rigidity makes responsive to aggregate demand. With the latter source of uncertainty a premium exists, but neither the risk premium nor output is affected by an increased variance of government spending.

Keywords: Exchange Rate Risk; Imperfect Capital Mobility (search for similar items in EconPapers)
Date: 1991-07
References: Add references at CitEc
Citations:

Downloads: (external link)
http://www.cepr.org/active/publications/discussion_papers/dp.php?dpno=567 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

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:cpr:ceprdp:567

Ordering information: This working paper can be ordered from
http://www.cepr.org/ ... pers/dp.php?dpno=567

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().