Capital Flows, Investment, and Exchange Rates

50 Pages Posted: 6 Apr 2004 Last revised: 14 Nov 2022

See all articles by Alan C. Stockman

Alan C. Stockman

University of Rochester - Department of Economics; National Bureau of Economic Research (NBER)

Lars E. O. Svensson

Stockholm School of Economics; Stockholm University - Institute for International Economic Studies (IIES); National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Date Written: April 1985

Abstract

This paper incorporates international capital flows into a two-country, monetary-general-equilibrium model of asset prices with investment and production. We use the model to calculate theoretical covariances between investment, the current account, the exchange rate, and the terms of trade.These covariances depend upon the coefficient of relative risk-aversion, the magnitude and sign of a country's net international indebtedness, other properties of tastes and technologies, and the stochastic processes on disturbances to productivity and monetary growth rates. International capital flows arise from changes in world wealth and its relative composition in foreign and domestic assets. The dynamic, stochastic relations between capital flows, exchange rates, investment, and the terms of trade are critically dependent on optimal portfolio allocations and the stochastic behavior of asset prices on international financial markets.

Suggested Citation

Stockman, Alan C. and Svensson, Lars E.O., Capital Flows, Investment, and Exchange Rates (April 1985). NBER Working Paper No. w1598, Available at SSRN: https://ssrn.com/abstract=336334

Alan C. Stockman (Contact Author)

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Lars E.O. Svensson

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Stockholm University - Institute for International Economic Studies (IIES) ( email )

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