Financial Integration, Liquidity and Exchange Rates / Vittorio Grilli, Nouriel Roubini.

Format:

Book

Author/Creator:

Grilli, Vittorio.

Contributor:

National Bureau of Economic Research.

Roubini, Nouriel.

Series:

Working Paper Series (National Bureau of Economic Research) no. w3088.

NBER working paper series no. w3088

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 1989.

Summary:

This paper presents a two-country extension of Lucas' (1988) work on the effects of cash-in-advance constraints in asset markets on the pricing of financial assets. The model is one where there exists some degree of separation between the goods markets and the asset markets and money is used for transactions in both markets. The main results of the paper are the following. First, the equilibrium level of the exchange rate depends on the share of money used for asset transactions: a greater share will correspond to a more appreciated exchange rate. Second, under uncertainty, liquidity effects deriving from stochastic shocks to bond creation lead to an "excess" volatility of nominal and real exchange rates even when the "fundamental" value of the exchange rate is constant. Third, capital controls in the form of taxes on foreign asset acquisitions tend to appreciate the exchange rate. Fourth, the maturity structure of the public debt affects the equilibrium exchange rate. In particular, a move towards a longer maturity structure will tend to depreciate the exchange rate.

Notes:

Print version record

August 1989.