The Current Account, the Spot Exchange Rate and the Demand for Money

Anthony Joseph, Maurice Larrain, Richard Ebil Ottoo

Abstract


We derive a theoretical balance of payments current account model from a framework that assumes a monetary model of exchange rates as a first state of the world, but then presumes the existence of deviations from purchasing power parity. In such a model there is slow price adjustment where short-run exchange rates deviate from long-run equilibrium exchange rates. Under these conditions there are accumulations of net foreign assets due to current account imbalances. A nonlinear model results where there is dependence between exchange rate deviations from equilibrium and the current account, as well as a concurrent dependence of the current account on exchange rate deviations. Furthermore, the current account is also shown to depend on the demand for money. Thus the theoretical explanation of the current account is concomitant on the short-run exchange rate and the determinants of money demand.


Full Text: PDF DOI: 10.5539/ijef.v4n3p13

Creative Commons License
This work is licensed under a Creative Commons Attribution 3.0 License.

International Journal of Economics and Finance  ISSN  1916-971X (Print) ISSN  1916-9728 (Online)

Copyright © Canadian Center of Science and Education

To make sure that you can receive messages from us, please add the 'ccsenet.org' domain to your e-mail 'safe list'. If you do not receive e-mail in your 'inbox', check your 'bulk mail' or 'junk mail' folders.