The Economics of Foreign Exchange and Global Finance by Peijie Wang

Author:Peijie Wang
Language: eng
Format: epub, pdf
ISBN: 9783662592717
Publisher: Springer Berlin Heidelberg

(9.2)

where superscript ∗ denotes the foreign country. Money, or domestic monetary base, comprises of the domestic bonds and foreign bonds held by the monetary authority of the domestic country:

(9.3)

with S being the exchange rate. Total private wealth, then, is given as the sum of the following three components:

(9.4)

Note Eq. (9.4) can be written in the following form through Eq. (9.1):

(9.4′)

That is, total private wealth is the sum of total domestic bonds and total foreign bonds in the hands of domestic private investors and monetary authorities. Note all the foreign bond variables are multiplied by the exchange rate in Eq. (9.2) to Eqs. (9.4) and (9.4′). Therefore, all these equations are in the measurement of the domestic currency.

Analysis of the demand for the three assets is fundamental to establish the conditions for equilibrium in each of the three markets and for the general equilibrium where all the three markets clear. The demand for the three assets is functions of the domestic interest rate, r, the expected change in the exchange rate, , and wealth, W. First, the demand for money function is specified as follows:

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