Econ306Lecture6 - International Economics II Lecture Notes...

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International Economics II Lecture Notes 6 Alper Duman July 23, 2009 Alper Duman International Economics II Lecture Notes 6
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The Portfolio Balance Approach to the Balance of Payments and the Exchange Rate I Financial markets across countries are extremely well integrated. I Domestic and foreign assets are imperfect substitutes. I Investors switch from these alternatives, and thus influencing FX via changes in the BOP accounts I Rational expectations are assumed to play an important role Alper Duman International Economics II Lecture Notes 6
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The Portfolio Balance Approach specifies the factors that influence the demand for money, but also it specifies the factors that influence the demand for other financial assets. I As we assume that domestic and foreign assets are imperfect substitutes, the Risk Premium (RP) is also included in the decision criteria: i d = i f + xa - RP (1) I RP, as expressed as a positive percentage, is the extra percentage compensation needed to induce the home investor to hold the foreign asset. Alper Duman
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This note was uploaded on 08/06/2009 for the course ECONOMICS ECON305 taught by Professor Alperduman during the Spring '09 term at Izmir University of Economics.

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Econ306Lecture6 - International Economics II Lecture Notes...

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