Citation

Discussion Paper Details

Please find the details for DP355 in an easy to copy and paste format below:

Full Details   |   Bibliographic Reference

Full Details

Title: Exchange Rate Determination with Bank-Financed Investment

Author(s): Merih Uctum and Michael R. Wickens

Publication Date: November 1989

Keyword(s): Bank Finance, Capital Controls and Exchange Rates

Programme Area(s): International Macroeconomics

Abstract: This paper analyses the effects of monetary shocks in the determination of exchange rates in economies where banks play a central role in providing finance for domestic investment and in international capital transactions. This is a situation that prevails in many countries, both developed and developing. For such countries the standard models of exchange rate determination are not strictly appropriate. As there are six state variables, a rational expectations simulation model is constructed and is used to carry out the dynamic analysis. In addition to the exchange rate there are two other jump variables in the model: Tobin's q and the shadow price of bank debt, which depends on expectations of future interest rates. It is shown that financing investment through intermediation helps to stabilize the economy following a domestic monetary shock but makes the economy more vulnerable to a foreign monetary shock.

For full details and related downloads, please visit: https://cepr.org/active/publications/discussion_papers/dp.php?dpno=355

Bibliographic Reference

Uctum, M and Wickens, M. 1989. 'Exchange Rate Determination with Bank-Financed Investment'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=355