Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/70235 
Year of Publication: 
2011
Series/Report no.: 
cege Discussion Papers No. 127
Publisher: 
University of Göttingen, Center for European, Governance and Economic Development Research (cege), Göttingen
Abstract: 
This paper develops an open economy portfolio balance model with endogenous asset supply. Domestic producers finance capital goods through credit and bonds in accordance with debt capital costs as well as through equity assets. Private households hold a portfolio of domestic and foreign assets, shift balances depending on risk-return considerations, and maximise real consumption in accordance with the real exchange rate. Within this general equilibrium model, it can be shown that expansive monetary interventions, being applied throughout the course of economic crises, stabilise the real amount of domestic investments at the cost of in ation, currency devaluation, distortions of interest rates, and risk clusters on the central bank's balance sheet. Furthermore, through exchange rate stabilising interventions, the central bank is able to stabilise the real amount of domestic investments and in turn the main goal of exchange rate stabilisation is also achieved. However, either risk clusters on central bank's balance sheet or changes in the domestic price level emerge. This consequently results in both types of central bank interventions promoting an ineffcient international allocation of real capital investments.
Subjects: 
portfolio balance
monetary policy
macroeconomic risk
exchange rate
real capital investments
JEL: 
E10
E44
E52
Document Type: 
Working Paper

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