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Monetary Policy in a Portfolio Balance Model with Endogenous Physical Capital

Habib Ahmed (), Paul Hallwood () and Stephen Miller ()

No 1997-08, Working papers from University of Connecticut, Department of Economics

Abstract: We develop a portfolio balance model with real capital accumulation. The introduction of real capital as an asset as well as a good produced and demanded by firms enriches extant portfolio balance models of exchange rate determination. We show that expansionary monetary policy causes exchange rate overshooting, not once, but twice; the secondary repercussion comes through the reaction of firms to changed asset prices and the firms' decisions to invest in real capital. The model sheds further light on the volatility of real and nominal exchange rates, and it suggests that changes in corporate sector profitability may affect exchange rates through portfolio diversification in corporate securities.

JEL-codes: F31 F32 (search for similar items in EconPapers)
Date: 1997-07
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Handle: RePEc:uct:uconnp:1997-08