Asset Markets and Exchange Rates: Modeling an Open Economy by Polly Reynolds Allen

By Polly Reynolds Allen

This paperback variation contains the 1st 3 elements of Allen and Kenen's significant publication, Asset Markets, trade charges, and fiscal Integration. those 3 elements stand on my own, because the authors meant and as reviewers have commented. In components 4 and 5 of that quantity they expand their version to 2 international locations buying and selling with the skin international and examine questions of monetary integration. The authors synthesize and expand contemporary advancements in overseas financial concept utilizing a normal version of an open economic climate that trades items and resources with the surface global. The version embodies the asset industry or portfolio method of reading balance-of-payments adjustment. alternate charges are decided within the brief run through stipulations within the asset markets and ultimately via stipulations within the items markets. the products markets comprise an export stable, and import reliable, and a nontradeable stable. Allen and Kenen express that assorted assumptions in regards to the substitutability among items or among resources can generate a number of well known types as targeted circumstances in their personal.

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Example text

We model the labor market explicitly, but neglect all others. The labor market, however, is described in terms that allow us to explore the implications of classical and Keynesian assumptions concerning the supply of labor and the money wage rate. There are three goods markets in the model-one for the foreign good and two for the domestic goods. The foreign good is supplied to the small economy at a constant foreign-currency price. The domestic goods are consumed at home by households and the government, but one (the export good) is also sold to foreigners, whereas the other (the nontraded good) is sold only at home.

But it is large enough to influence the prices of the things it sells, notably the price of its export good. 4 It does not fix the terms of trade and does not rule out any type of product-market substitution. Thus, we encounter substitution between the two traded goods and between each traded good and the nontraded good. More important for our purposes, our approach is less restrictive than the most common treatment of trade in securities. Many models used to study capital mobility contain a single bond and interest rate.

To hold that expectation, they would have to behave in a Kantian fashion-to refrain from buying a foreign bond because it would be pointless to do so if every other household bought one too. On Kantian behavior and jts implications, see J. J. LafTont, "Macroeconomic Constraints, Economic Efficiency and Ethics: An Introduction to Kantian Economics," Economica, 42 (November 1975), pp. 430-7. We are indebted to Elhanan Helpman for calling this point to our attention. 44) *£? 45) *£? 46) *L* = L\ Taken together with Eqs.

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