DP1337 Exchange Rate Dynamics and Financial Market Integration

Author(s): Alan Sutherland
Publication Date: January 1996
Keyword(s): Capital Mobility, Exchange Rates, Financial Market Integration
JEL(s): F31, F32, F36
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=1337

Imperfect capital mobility is modelled in a two-country intertemporal general equilibrium framework by assuming that agents face costs of adjusting asset stocks in foreign asset markets. Goods markets are imperfectly competitive and goods prices are subject to sluggish adjustment. Simulation experiments show that increasing financial market integration (represented by reducing the cost of transacting in foreign asset markets) increases the volatility of a number of variables when shocks originate from the money market, but decreases the volatility of most variables when shocks originate from real demand or supply.