The stock market and exchange rate dynamics

Michael K. Gavin

No 278, International Finance Discussion Papers from Board of Governors of the Federal Reserve System (U.S.)

Abstract: This paper articulates a model of the small, open economy in which the stock market, rather than the bond market, determines domestic aggregate demand. It resembles in many respects the widely adopted dynamic Mundell-Fleming approach, but can, in some circumstances, exhibit output and asset price dynamics that differ in economically illuminating ways from that more standard framework. In particular, if the stock market effects are important enough, then a monetary expansion can result in real exchange rate appreciation, rather than depreciation. Anticipated fiscal expansion can, if the favorable effects on future productivity lead to strong enough stock market effects, lead to an output expansion, rather than a contraction as in, for example, Burgstaller (1983), Blanchard (1984) and Branson, Fraga and Johnson (1985). Furthermore, if the delay between announcement and implementation of the fiscal expansion is long enough, an anticipated fiscal expansion can lead to exchange rate depreciation, rather than appreciation.

Keywords: Stock market; Foreign exchange rates (search for similar items in EconPapers)
Date: 1986
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.federalreserve.gov/pubs/ifdp/1986/278/default.htm (text/html)
http://www.federalreserve.gov/pubs/ifdp/1986/278/ifdp278.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:fip:fedgif:278

Access Statistics for this paper

More papers in International Finance Discussion Papers from Board of Governors of the Federal Reserve System (U.S.) Contact information at EDIRC.
Bibliographic data for series maintained by Ryan Wolfslayer ; Keisha Fournillier ().