11-03-08-Asset Markets in the Open Economy (1)

11-03-08-Asset Markets in the Open Economy (1) -...

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Financial Instruments In The Open Economy There are an extraordinary number of different market instruments (assets) which are available  to an agent as a way of holding her wealth: money, stocks, bonds, deeds for real estate, foreign  exchange, forward contracts on precious metals, etc.  In order to provide a framework in which  we can make sense of what is going on in a small open economy such as Canada, we need to  simplify.   The usual disaggregation of assets is as follows: 1.  domestic money 2.  domestic bonds 3.  foreign bonds 4.  foreign exchange The country’s holdings of these four market instruments sum to the (exogenous) value of  wealth in the short and intermediate run. The sum of a country’s holdings of these four market instruments is equal to its wealth.  Wealth  is assumed to be given during the short and intermediate runs.  Only in the long run is wealth  assumed to change, as a Current Account surplus or deficit has its impact on the size of the  country’s balance sheet.  (For example, the US has a large Current Account deficit with the  Republic of China.  As a result, US wealth is declining over time, as it owes more and more to  the Chinese.)
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This note was uploaded on 07/16/2011 for the course ECON 2154 taught by Professor Boyer during the Winter '10 term at UWO.

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11-03-08-Asset Markets in the Open Economy (1) -...

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