Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/245471 
Year of Publication: 
2021
Series/Report no.: 
CESifo Working Paper No. 9290
Publisher: 
Center for Economic Studies and ifo Institute (CESifo), Munich
Abstract: 
This paper proposes an equilibrium theory of nominal exchange rates, which offers a new perspective on various issues in open economy macroeconomics. The nominal exchange rate and portfolio choices are jointly determined in equilibrium, thus providing a new approach to overcoming the indeterminacy results in Kareken and Wallace (1981). The distinctive features of this theory are that the nominal exchange rate is determined in international financial markets, that the risk premium and UIP deviations are fully endogenous equilibrium objects and that the real exchange rate inherits its properties from the nominal exchange rate. In terms of policy, this novel theory implies that a country with an exchange rate peg and free asset mobility faces a tetralemma and not a trilemma, because it loses not only monetary policy independence but also fiscal policy independence.
Subjects: 
exchange rate
determinacy
incomplete markets
monetary and fiscal policy
international asset flows
JEL: 
D52
E31
E43
E52
E62
E63
Document Type: 
Working Paper
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