Exchange Rate Dynamics, Endogenous Risk Premium and the Balance Sheet Effect: An Effective Demand Model

IF 0.3 Q4 ECONOMICS

South Asian Journal of Macroeconomics and Public Finance Pub Date : 2018-09-26 DOI:10.1177/2277978718795775

Moumita Basu, J. Sengupta, Ranjanendra Narayan Nag

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Abstract

This article describes a macroeconomic framework for analysing the interaction between output, domestic interest rate and exchange rate in the presence of the endogenous risk premium and balance sheet effect of exchange rate depreciation on investment demand. Output is demand determined. There are three assets: money, domestic bonds and foreign bonds. Domestic bonds and foreign bonds are not perfect substitutes due to the presence of risk premium. The endogenous risk premium depends on certain macroeconomic fundamentals, namely budget deficit and current account balance. Using this framework, we will examine implications of monetary policy, fiscal policy, tariff liberalization and global interest rate hike for exchange rate dynamics and output. The balance sheet effect and the risk premium together explain how an expansionary fiscal policy may generate recession, while tariff liberalization may produce favourable macroeconomic outcomes. Moreover, the model shows that an increase in world interest rate may have contractionary effect on the domestic output level due to the presence of the balance sheet effect of exchange rate depreciation. JEL Classification: E27, E63, F13, F32

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汇率动态、内生风险溢价与资产负债表效应:一个有效的需求模型

本文描述了一个宏观经济框架，用于分析存在内生风险溢价和汇率贬值对投资需求的资产负债表效应的产出、国内利率和汇率之间的相互作用。产出由需求决定。有三种资产:货币、国内债券和国外债券。由于风险溢价的存在，国内债券与国外债券并非完全替代。内生风险溢价取决于一定的宏观经济基本面，即预算赤字和经常账户余额。利用这一框架，我们将研究货币政策、财政政策、关税自由化和全球加息对汇率动态和产出的影响。资产负债表效应和风险溢价共同解释了扩张性财政政策如何可能产生衰退，而关税自由化可能产生有利的宏观经济结果。此外，该模型表明，由于汇率贬值的资产负债表效应的存在，世界利率的上升可能对国内产出水平产生收缩效应。JEL分类:E27, E63, F13, F32

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来源期刊

South Asian Journal of Macroeconomics and Public Finance ECONOMICS-

CiteScore

2.10

自引率

11.10%

发文量

期刊介绍： The purpose of the Journal is to publish (in English language) peer-reviewed articles, reviews and scholarly comments on issues relating to contemporary global macroeconomics and public finance by which is understood: The Journal is for all professionals concerned with contemporary Macroeconomics and Public Finance and is a forum for all views on related subjects. The Editorial Board welcomes articles of current interest on research and application on the areas mentioned above. The Journal will be international in the sense that it seeks research papers from authors with an international reputation and articles that are of interest to an international audience. In pursuit of the above, the journal shall: a. draw on and include high quality work from the international community of scholars including those in the major countries of Asia, Europe, Asia Pacific, the United States, other parts of the Americas and elsewhere with due representation for considerations of the readership. The Journal shall include work representing the major areas of interest in contemporary research on Macroeconomics and Public Finance and on a wide range of issues covering macro- economics, tax and fiscal issues, banking and finance, international trade, labour economics, computational and mathematical methods, etc. The Journal would particularly engage papers on pure and applied economic theory and econometric methods. b. avoid bias in favour of the interests of particular schools or directions of research or particular political or narrow disciplinary objectives to the exclusion of others. c. ensure that articles are written in a terminology and style which makes them intelligible, not merely within the context of a particular discipline or abstract mode, but across the domain of relevant disciplines.