Yamaguchi, Kaoru, "Balance of Payments and Foreign Exchange Dynamics - SD Macroeconomic Modeling (4) -", 2007 July 29-2007 August 2
This paper tries to model a dynamic determination of foreign exchange rate
in an open macroeconomy in which
goods and services are freely traded and financial capital flows efficiently
for highest returns.
For this purpose it becomes necessary to employ a new method
contrary to standard methods of dealing with a foreign sector as
adjunct to macroeconomy;
that is, an introduction of another macroeconomy as a foreign sector.
Within this new framework of open macroeconomy, transactions among
domestic and foreign sectors are handled according to the principle of
accounting system dynamics developed by the author, and
the balance of payments is attained.
For the sake of simplicity of analyzing foreign exchange dynamics,
macro variables such as GDP, its price level and interest rate are
treated as outside parameters.
Then, eight scenarios are produced and examined
to see how exchange rate, trade balance and financial investment, etc.
respond to such outside parameters.
To our surprise, expectations of foreign exchange rate turn out to play
a crucial role for destabilizing trade balance and financial investment.
The impact of official intervention on foreign exchange and a path to
default is also discussed.
This is the whole item.
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- 2007 July 29-2007 August 2
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