Working Paper: NBER ID: w1576
Authors: David H. Papell
Abstract: An econometric portfolio balance model of an open economy, incorporating exchange rate, price, and current account dynamics, is derived and estimated.The usual stability conditions do not guarantee a unique rational expectations solution, and several proposals for resolving this situation are considered. Using constrained maximum likelihood methods, the model is estimated for Japan.The estimation results indicate that the model is quite successful in explaining the patterns found in the data. The model is estimated using several methods of resolving the question of non-uniqueness, and the results are compared.
Keywords: No keywords provided
JEL Codes: No JEL codes provided
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| price level changes (E30) | exchange rate movements (F31) |
| increase in domestic income (E25) | current account (F32) |
| expected rate of depreciation (E43) | demand for domestic assets (E41) |
| demand for domestic assets (E41) | current account balance (F32) |
| money supply (E51) | exchange rates (F31) |
| money supply (E51) | domestic price levels (P22) |
| money supply (E51) | foreign price levels (F31) |
| depreciation of the exchange rate (F31) | current account deficit (F32) |
| shocks to foreign output (F41) | exchange rate dynamics (F31) |