Real Financial Market Exchange Rates and Capital Flows

26 Pages Posted: 21 Jun 2016

See all articles by Maria Gelman

Maria Gelman

University of Kiel

Axel Jochem

Deutsche Bundesbank

Stefan Reitz

University of Kiel

Date Written: 2013

Abstract

Foreign exchange rates and capital movements are expected to be closely related to each other as international capital markets become more and more integrated. To account for this fact we construct an index of real effective exchange rates as a weighted average of cross-country asset price ratios. The empirical analysis reveals that a country's real financial effective exchange rate is cointegrated with net foreign holdings of its assets. Comparing the empirical performance of the new index with a standard effective exchange rate deflated by goods prices we find that only the former exhibits an influence on the international flow of capital.

Keywords: Real Effective Exchange Rate, Capital Flows, Financial Markets

JEL Classification: F31, G15, E58

Suggested Citation

Gelman, Maria and Jochem, Axel and Reitz, Stefan, Real Financial Market Exchange Rates and Capital Flows (2013). Bundesbank Discussion Paper No. 50/2013. Available at SSRN: https://ssrn.com/abstract=2796942

Maria Gelman (Contact Author)

University of Kiel

Olshausenstr. 40
D-24118 Kiel, Schleswig-Holstein 24118
Germany

Axel Jochem

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

Stefan Reitz

University of Kiel

Olshausenstr. 40
D-24118 Kiel, Schleswig-Holstein 24118
Germany

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