Exchange Rates and Portfolio Balance

40 Pages Posted: 23 Apr 2004 Last revised: 15 Jul 2010

See all articles by John P. Martin

John P. Martin

Organization for Economic Co-Operation and Development (OECD) - Directorate for Employment, Labour and Social Affairs (ELS); IZA Institute of Labor Economics; Sciences Po

Paul R. Masson

International Monetary Fund (IMF) - Research Department; The Brookings Institution

Date Written: August 1979

Abstract

An open economy portfolio balance model, describing allocation among money, a domestic bond, and a traded foreign currency bond is developed for a world of many countries. A special role is attributed to the dollar, namely that all internationally traded bonds are denominated in that currency. It is shown that in the short run with real variables exogenous and expectations static, stability requires that all countries except the U.S. be net creditors in dollar-denominated bonds. What data are available on inter-country claims suggest that some countries may well be net debtors abroad in foreign currency. In particular, if one excludes direct investment claims, private claims on the rest of the world by Japan and Canada have been negative over the period of floating rates since 1973. However, some preliminary reduced-form regression equations for the dollar exchange rates of these two countries do not support the implications of the portfolio balance model in the debtor case. On the other hand, an equation for a composite of Western European currencies (by our calculations, this group of countries is a net creditor) gives more promising results.

Suggested Citation

Martin, John P. and Masson, Paul R., Exchange Rates and Portfolio Balance (August 1979). NBER Working Paper No. w0377. Available at SSRN: https://ssrn.com/abstract=261230

John P. Martin (Contact Author)

Organization for Economic Co-Operation and Development (OECD) - Directorate for Employment, Labour and Social Affairs (ELS) ( email )

2 rue Andre Pascal
Paris Cedex 16, 75775
France

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Sciences Po ( email )

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France

Paul R. Masson

International Monetary Fund (IMF) - Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States

The Brookings Institution ( email )

1775 Massachusetts Ave. NW
Washington, DC 20036-2188
United States
202-797-6278 (Phone)
202-797-2968 (Fax)

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