Floating exchange rates with liquidity constraints in financial markets

Elhanan Helpman*, Assaf Razin

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

Abstract

We construct a two-country model in which there exist cash in advance constraints in commodity as well as in asset markets. The seller's currency is used for transactions in commodity markets and the lender's money is used for transactions in the bond markets. The exchange rate equation that emerges from this structure has a new feature - it exhibits a bias towards depreciation of the borrowers' currency. We describe the equilibrium dynamics of this type of a world economy and show that it may exhibit cyclical movements.

Original languageEnglish
Pages (from-to)99-117
Number of pages19
JournalJournal of International Economics
Volume19
Issue number1-2
DOIs
StatePublished - Aug 1985

Funding

FundersFunder number
Social Science Research Council

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