International Economics
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Dominick-Salvatore-International-Economics
Problem Suppose that the values obtained by estimating Equation (15A-8) for a particular
nation over a specified period of time are a = b = c = 1 and gu = gi = gm = 0. Suppose also that at the beginning of the period of the analysis, D = 100 and F = 20 in this nation and during the period of the analysis gP = 10% and gY = 4% and the nation’s monetary authorities increase D from 100 to 110. Estimate the value of this nation’s international reserves (F ) at the end of the period under fixed exchange rates. A15.2 Formal Portfolio Balance Model and Exchange Rates In this section we present a simple one-country formal portfolio balance model in which individuals and firms hold their financial wealth in some combination of domestic money, a domestic bond, and a foreign bond denominated in the foreign currency. The basic equations of the model can be written as follows: M = a(i, i ∗ )W (15A-9) D = b(i, i ∗ )W (15A-10) Salvatore c15.tex V2 - 10/18/2012 12:45 A.M. Page 499 A15.2 Formal Portfolio Balance Model and Exchange Rates 499 RF = c(i, i ∗ )W (15A-11) W = M + D + RF (15A-12) where M is the quantity demanded of nominal money balances by domestic residents, D is the demand for the domestic bond, R is the exchange rate (defined as the domestic currency price of a unit of the foreign currency), RF is the demand for the foreign bond in terms of the domestic currency, W is wealth, i is the interest rate at home, and i ∗ is the interest rate abroad. The first three equations postulate that the quantity demanded of domestic money bal- ances, the domestic bond, and the foreign bond by the nation’s residents are functions of, or depend on, the domestic interest rate and the foreign interest rate, and are equal to a Download 7.1 Mb. Do'stlaringiz bilan baham: |
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