Stock Markets and the Real Exchange Rate: An Intertemporal Approach

Author/Editor:

Benoît Mercereau

Publication Date:

May 1, 2003

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

The paper presents an N-country model with stock markets, in which a closed-form solution for the real exchange rate is derived. Risky asset prices and allocation of risky assets among countries are determined endogenously. Such a framework allows an analysis of how fundamental parameters, such as the variance and covariance of the risky assets or demographic variables, affect the real exchange rate. The predictions of the model are contrasted with the Balassa-Samuelson effect. A new transmission channel of the real exchange rate for parameters such as income on net foreign assets, risk aversion, and risk-hedging opportunities is also explored.

Series:

Working Paper No. 2003/109

Subject:

Asset prices Exchange rates Financial markets Foreign exchange Prices Production Productivity Real exchange rates Stock markets

English

Publication Date:

May 1, 2003

ISBN/ISSN:

9781451853230/1018-5941

Stock No:

WPIEA1092003

Pages:

35

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