Ma ion, Nancy Pe eg im
A icle
Two-Tie Exchange Ra es and Mone a y Au onomy in a
Po olio-Balance Model
Zei sch i ü Wi scha s- und Sozialwissenscha en (ZWS) - Vie eljah essch i de
Gesellscha ü Wi scha s- und Sozialwissenscha en, Ve ein ü Socialpoli ik
P o ided in Coope a ion wi h:
Duncke & Humblo , Be lin
Sugges ed Ci a ion: Ma ion, Nancy Pe eg im (1979) : Two-Tie Exchange Ra es and Mone a y
Au onomy in a Po olio-Balance Model, Zei sch i ü Wi scha s- und Sozialwissenscha en
(ZWS) - Vie eljah essch i de Gesellscha ü Wi scha s- und Sozialwissenscha en, Ve ein ü
Socialpoli ik, ISSN 0342-1783, Duncke & Humblo , Be lin, Vol. 99, Iss. 1-2, pp. 45-64,
h ps://doi.o g/10.3790/schm.99.1-2.45
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Two-Tie Exchange Ra es and Mone a y Au onomy
in a Po olio-Balance Model
By Nancy Pe eg im Ma ion*
Small open economies ha wish o peg hei cu encies o hose o
hei majo ading pa ne s o en ind hemsel es hampe ed by in-
e es -sensi i e and specula i e capi al lows ha unde mine hei
abili y bo h o main ain ixed exchange a es and o pu sue an in-
dependen mone a y policy. Some coun ies, no ably he Belgo-Luxem-
bou g Economic Union, F ance and I aly, ha e expe imen ed wi h he
wo- ie exchange ma ke in he hopes o insula ing hei economies
om in e na ional capi al lows and es o ing some au onomy o
domes ic mone a y policy. Such an exchange egime in ol es he o mal
es ablishmen o sepa a e exchange ma ke s o cu en and capi al
ansac ions. The comme cial exchange a e, de e mined in he ma ke
o cu en ansac ions, is equen ly pegged by he au ho i ies; he
inancial exchange a e, de e mined in he ma ke o capi al ansac-
ions, is usually ee o luc ua e.
The pu pose o his pape is o examine he impac e ec s o ce ain
dis u bances and changes in policies on a small open economy main-
aining a wo- ie exchange ma ke . The ask a hand is eally wo old:
i s , o de elop a po olio-balance model o a wo- ie exchange ma ke
and second, o de e mine whe he he wo- ie exchange ma ke pe mi s a
coun y o gain some au onomy o e i s mone a y policy when inancial
asse s a e ei he impe ec ly o pe ec ly subs i u able. Fo he pu pose
o his pape , mone a y au onomy is de ined o mean ha he au ho -
i ies can egula e ne capi al lows independen ly o he ela i e a es
o e u n a home and ab oad and hus ha e some con ol o e he
domes ic in e es a e.
The wo- ie exchange ma ke model is desc ibed below and is
sol ed in Appendix I. A second e sion o he wo- ie exchange e-
gime, one which in ol es a di e en segmen a ion o he exchange
ma ke , is p esen ed and sol ed in Appendix II. In o de o compa e
* Depa men o Economics, Da mou h College, Hano e , New Hampshi e
03755, USA.
I am g a e ul o William B anson and Pe e B. Kenen o help ul dis-
cussions.
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46 Nancy Pe eg ini Ma ion
hese models wi h mo e amilia exchange- a e sys ems, he solu ions
o bo h he uni a y lexible and uni a y ixed exchange a e a e p e-
sen ed in Appendix III and IV; hey se e as backd ops o he discus-
sion o wo- ie exchange a es.
While he models can gene a e much ui ul analysis and compa i-
son, bo h in espec o sho - un beha io and s eady s a e p ope ies,
and can be ex ended in a numbe o ways,1 his pape will ocus on
impac e ec s in he asse ma ke s o he wo- ie exchange sys em.
I will examine he sho - un de e mina ion o he domes ic in e es
a e and he inancial exchange a e and will hen examine hei e-
sponses o a ious dis u bances. I will show ha he au ho i ies ha e
some con ol o e he domes ic in e es a e, e en in he case o pe -
ec subs i u abili y be ween domes ic and o eign bonds, when in e es
income, a cu en -accoun i em, is epa ia ed a he comme cial ex-
change a e, bu ha hey lose con ol o e he in e es a e when
in e es income is channeled h ough he inancial exchange ma ke .
Desc ip ion o he Model
The model p esen ed below ex ends o he egime o wo- ie ex-
change a es he po olio balance heo y de eloped by James Tobin
(1969) e . al. in which weal h holde s decide how o dis ibu e ne wo h
among a ailable asse s based on ela i e a es o e u n and he size
o he o al po olio. I assumes ha demands o asse s a e s ock
a he han low demands and a e ealized ins an aneously so ha
ac ual holdings o asse s always e lec he desi ed composi ion o he
po olio. Dis u bances o po olio equilib ium c ea e s ock adjus -
men s as po olios a e ebalanced, causing ins an aneous changes in he
domes ic in e es a e and he inancial exchange a e. In addi ion,
dis u bances al e he a e o accumula ion o inancial asse s.
In he model, he inancial exchange a e is ea ed as a ela i e asse
p ice. I is among he a iables ha equilib a e asse ma ke s and i
is de e mined in he sho un in hose asse ma ke s.2
1 Fo example, he inancial sec o o he wo- ie model can be ex ended
by adding a domes ic asse which is aded, by adding expec a ions and
by allowing o leakages be ween he wo exchange ma ke s. The comple e
wo- ie exchange ma ke would include a goods sec o and one could as-
sume a ixed comme cial exchange a e o a comme cial a e ha loa ed in
i s own ie . One can a gue ha neglec ing he goods ma ke in his exe -
cise is no a se ious omission since he model is cons uc ed so ha he
inancial ma ke s a e una ec ed on impac by dis u bances in he goods
ma ke .
2 When a Keynesian goods ma ke ( ixed p ices, adjus able ou pu ) is added
o he inancial sec o and he s eady-s a e solu ions a e examined, one
disco e s ha he inancial exchange a e is esponsi e o e en s in he
goods ma ke as well as o inancial dis u bances.
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Two-Tie Exchange Ra es and Mone a y Au onomy 47
P i a e Weal h and Demands o Financial Asse s
The model con ains h ee inancial asse s — a bond issued by he
go e nmen o he small coun y and held only by i s own esiden s,
a s ock o money issued by i s cen al bank and held in e nally, and
a bond issued in he ou side wo ld and a ailable o he small coun y
in pe ec ly elas ic supply. Fo eign money is no held domes ically bu
i s exis ence is implied by he exchange a e.
Assuming ixed p ices and no physical capi al s ock, he weal h o
p i a e households can be w i en as he nominal (= eal) domes ic-
cu ency alue o he money and bonds hey cu en ly hold:
(1) wh = L* + B*> + eFh
whe e Lh is he ac ual s ock o money held by households, Bh is he
numbe o domes ic bonds held, Fh is he numbe o o eign bonds held
and e is he spo inancial exchange a e ( he p ice o o eign cu ency
in e ms o domes ic cu ency).3 Fo simplici y, i is assumed ha all
bonds a e sho - e m, wi h ixed p ices in uni s o he cu ency o he
issue and a iable in e es a es.
The in e es a e on he o eign bond is de e mined in he wo ld
ma ke and gi en exogenously o he small open economy ( ' = '). The
in e es a e on he domes ic bond, , can a y independen ly o he
o eign a e since p i a e weal h holde s in he small coun y ega d
he wo ypes o bonds as impe ec subs i u es.4
Weal h holde s base hei nominal (= eal) demands o asse s in
e ms o domes ic cu ency. The ac ion o he weal h hey wish o
hold in each o he h ee asse s is assumed o depend on he e ec i e
a es o e u n on domes ic and o eign bonds bu no on income.5 In
a wo- ie exchange- a e sys em whe e he p incipal on bonds mus
be acqui ed a he inancial exchange a e, e, bu he in e es income
mus be epa ia ed a he ixed comme cial exchange a e, e, he e ec-
i e a e o e u n on o eign bonds pe cei ed by domes ic weal h
3 While I am awa e o he a gumen ha domes ic bonds issued by he
domes ic go e nmen a e no weal h (Ba o, 1974), I choose he e o ollow
he o he adi ion.
4 Why a e he wo bonds conside ed impe ec subs i u es and why, i
he e a e no ansac ions cos s, would anyone hold money? Weal h holde s
would wan o hold bo h domes ic and o eign bonds because o exchange
isks and hey would wan o hold money as well as sho - e m bonds, e en
i he e we e no ansac ions cos s, i hey pe cei ed a de aul isk on bonds.
6 The a ionale o excluding income in a model ha assumes ins an aneous
po olio adjus men can be ound in Allen, (1976), Hellwig (1975) and Allen-
Kenen ( o hcoming).
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48 Nancy Pe eg im Ma ion
holde s is , which I shall call u.6 A change in he di e en ial be -
ween he comme cial and inancial exchange a es can hus in luence
capi al mo emen s di ec ly h ough a a e-o - e u n mo i e.
The demand unc ions can be w i en as:
(2) Bd = b ( , u) Wh
(3) Ul =
I
( , u) Wh
(4)
eF<*
= ( , u) Wh
W
whe e u = — •
The balance-shee cons ain o p i a e weal h holde s equi es ha
he sum o hei demands o all asse s mus be equal o he weal h
hey cu en ly hold. This cons ain means ha :
b+l+j= 1
b + l + = 0
K + lu + = 0
I is assumed ha he h ee asse s a e g oss subs i u es, so ha desi ed
holdings o a bond inc ease when he e u n on ha bond ises, while
he desi ed holdings o he o he bond and o money decline:
b > 0 , l < 0
u > 0 bu , lu < 0
I all pa ials a e non-ze o, i can be deduced ha each own pa ial
mus be la ge in absolu e alue han ei he c oss pa ial:
b > b > l whe e b , > l # 0
u> bu u>
I
lu whe e u, bu, lu 4= 0
Fu he mo e, wi h ins an aneous adjus men , he quan i ies demand-
ed, Bd, Ld, Fd, a e equal o he amoun s ac ually held, Bh, Lh and Fh in
(1). Fo his eason, any one o he demand equa ions is sa is ied when
he o he wo a e sa is ied.
6 In he gene al case, he e ec i e a e o e u n on o eign bonds pe cei ed
by domes ic esiden s would be:
p?'
(1 + a) — +
whe e a is equal o he expec ed dep ecia ion in he ixed comme cial
exchange a e and n is he expec ed dep ecia ion in he inancial a e. In
his pape , i is assumed ha weal h holde s expec he comme cial a e
o emain ixed {TZ= 0). I is also assumed ha he expec ed dep ecia ion
o he inancial a e is he same o all weal h holde s and has a p obabili y
dis ibu ion a ound mean ze o, so ha n
—
0. In a mo e gene al model,
expec a ions should be made explici .
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Two-Tie Exchange Ra es and Mone a y Au onomy 49
The ma ke s o he h ee asse s a e assumed o be pe ec ly com-
pe i i e and clea a all imes.
The ma ke -clea ing equa ion o domes ic bonds is:
(5) B
—
Bc
—
Bh = 0
whe e B is he ixed supply and Bc is he amoun held by he cen al
bank.
The ma ke -clea ing equa ion o domes ic money is:
(6) L
—
Lh = 0
whe e L is he supply o money de e mined by he banking sys em.
The ma ke -clea ing equa ion o o eign bonds is:
(7) eF - eF* = 0
whe e F is he pe ec ly elas ic supply o o eign bonds a ailable o
domes ic weal h holde s. (7) will be ue when (5) and (6) a e sa is ied.
I should be s essed he e ha he omission o income om he asse
demand unc ions has an impo an analy ical p ope y: i pe mi s he
pa i ionabili y o he inancial ma ke s om he goods ma ke . I
p o ides s ong jus i ica ion o s udying, in isola ion, he impac e -
ec s o inancial dis u bances on he asse ma ke s. When income is
excluded om he asse demand unc ions, he inancial sec o is un-
a ec ed on impac by e en s in he goods ma ke .
I one we e o con as he dynamics and long- un p ope ies o wo-
ie and uni a y exchange a es in he ace o inancial dis u bances,
che esul s would di e om he impac e ec s in pa because o eed-
back e ec s om he goods ma ke . On impac , howe e , he e ec s o
inancial dis u bances on he asse ma ke s a e he same whe he o
no a goods ma ke is included. A sho - un analysis o jus he inan-
cial ma ke s can be unde aken. Addi ionally, once he impac e ec
o any inancial dis u bance on he domes ic in e es a e is de e mined,
one can in e he change in ou pu , p o ided ha he change in he
domes ic in e es a e is he dominan inancial dis u bance in he
goods ma ke .
The Banking Sec o
*
The banking sec o consis s o one cen al bank. The e a e no com-
me cial banks. The liabili ies o he cen al bank a e equal o he
s ock o money held by he p i a e sec o , Lh; i s asse s a e i s hold-
ings o domes ic bonds, Bc, and he domes ic-cu ency alue o i s
o eign-cu ency ese es, èR. The cen al bank balance shee is:
4 Zei sch i ii Wi scha s- und Sozialwissenscha en 1979/1/2
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50 Nancy Pe eg ini Ma ion
(8) Lk = Bc - eR
—
Wc
whe e Wc ep esen s he cen al bank's ne wo h; Wc changes o e lec
capi al gains and losses esul ing om changes in he comme cial ex-
change a e, by which he cen al bank is assumed o alue i s ese es.
The cen al bank's holdings o domes ic bonds, Bc, is an exogenous
policy ins umen . The in e es income o he cen al bank is Bc.
Replacing L wi h (8) and Lh wi h (3), he ma ke -clea ing equa ion
o domes ic money (6) can be ew i en as:
(9) Be + eR -
V/c
-
I
( ,
u)
W* = 0
Replacing Bh wi h (2), he ma ke -clea ing equa ion o domes ic
bonds (5) can be ew i en as:
(10) B
—
Bc
—
b
( , u)
Wh = 0
Sa ing
Weal h can be al e ed in wo ways — by sa ing ou o cu en income
and by capi al gains o losses due o changes in he inancial exchange
a e. Following Allen-Kenen ( o hcoming), he o ali y o weal h ac-
cumula ed h ough ime as a consequence o sa ing will be de ined as:
T T
(11) Whs =
J
Sd =
J
(i> +
B>*
+ eFh)
d
o o
whe e Lh, Bh and Fh ep esen ime a es o change.
Subs i u ing (8) in o (11) and ecalling ha Bh = B - Bc yields:
T T
(12) W^ = Sd =
(B
+ eR + eh) d
o o
Whs changes only g adually h ough ime. I is he e o e exogenous o
he analysis o impac e ec s al hough impo an in he dynamics.
To al weal h, a his o y o sa ing and o capi al gains and losses, can
be w i en as:
T
(13) W7i = W/iS +
J
Fh e
d
o
I s ime de i a i e is:
(14) Wh = Whs + Fh e
d
The s ock o o al weal h can change ins an aneously since mo emen s
in he inancial exchange a e b ing abou immedia e capi al gains o
losses.
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Two-Tie Exchange Ra es and Mone a y Au onomy 51
Domes ic holdings o o eign bonds
In his model, he small coun y canno accumula e o eign bonds
ei he in he sho - un o o e ime. The cen al bank does no supply
o eign cu ency o sa is y an excess demand o o eign bonds, so ha
any excess demand me ely bids up he inancial exchange a e in he
sho - un.
The small coun y can accumula e o eign asse s ( ese es) o e ime
by unning a cu en -accoun su plus. In ac , i he go e nmen bud-
ge is balanced a all imes, which implies B = B, he only way he
coun y can sa e is h ough a cu en -accoun su plus. Bu p i a e
households canno use a cu en -accoun su plus o accumula e o eign
bonds. They mus channel hei cu en -accoun ansac ions h ough
he comme cial exchange ma ke and u n any ne p oceeds o e o he
cen al bank in exchange o domes ic money.7 (The cen al bank, in
u n, can use he p oceeds o acqui e ese es). I households now wan
o acqui e o eign bonds, hey mus go h ough he inancial exchange
ma ke . Doing so me ely bids up he inancial exchange a e. Thus
he wo- ie exchange ma ke , as modeled abo e, p e en s households
om accumula ing o eign bonds a any poin in ime o o e ime.
The dynamic equa ion o he model can be exp essed as:
(15)
Whs
= s = eR
when he go e nmen budge is balanced and a wo- ie exchange- a e
sys em is in e ec .
The ma ke -clea ing equa ions o domes ic bonds and money (10) and
(9) can be sol ed o changes in he domes ic in e es a e and he
inancial exchange a e, gi en he exogenous a iable ', he policy-
de e mined a iables Bc and e, and he his o y o household sa ing,
V/hs.
The s anda d wo- ie exchange- a e model, hence o h called Model
I, is sol ed in Appendix I. In Appendix II, a pe mu a ion o he wo-
ie exchange egime is p esen ed and sol ed (Model II). In ha pe mu-
a ion, in e es income as well as all capi al accoun ansac ions a e
channeled h ough he inancial exchange ma ke . As a esul , he
e ec i e yield on domes ic esiden s' o eign bond holdings is equi a-
len o a he han — . A change in he di e en ial be ween com-
7 Ins i u ionally, esiden s' ne o eign-exchange p oceeds may be held in a
special non-in e es -bea ing accoun o be used solely o u u e pu chases
o goods and se ices om he es o he wo ld. Fo simplici y, I igno e his
op ion and assume ha all ne p oceeds mus be u ned o e o he cen al
bank.
4*
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52 Nancy Pe eg im Ma ion
me cial and inancial exchange a es can no longe in luence capi al
mo emen s di ec ly by a ec ing he a e o e u n. In addi ion, e-
pa ia ion o in e es income canno al e ese e holdings o e ime.
Finally, he mos in e es ing implica ion o his pe mu a ion is ha
esiden s a e able — and indeed a e obliged — o accumula e o eign
asse s o e ime using he in e es -income p oceeds ea ned om o eign
holdings. As long as esiden s main ain some o eign asse s in hei
po olios and ecei e a posi i e yield, in e es -income in lows o he
inancial ma ke mus be ma ched by con inual capi al ou lows o e
ime. The model canno con e ge on a s eady-s a e since he sys em
canno each long- un s ock equilib ium in he asse ma ke s.
In o de o compa e he s anda d wo- ie exchange sys em and i s
pe mu a ion o mo e amilia exchange- a e egimes, he model is con-
e ed o a uni a y lexible exchange a e and sol ed in Appendix III.
I is hen con e ed o a uni a y ixed exchange a e and sol ed in
Appendix IV.
The signs o all impac e ec s con ained in all appendices a e dis-
played below in Table I:
Table I
Table 1.1
Two-Tie Exchange Model
(Model I)
Table 1.2
Two-Tie Exchange Model
(Model II)
Dis u bance E ec
3 3 c Dis u bance E ec
3 3 c
3 Be — + dB* +
3 ' ? + 3 ? +
3 c ? + 3 c 0 0
Table 1.3 Table 1.4
Flexible Exchange Ha e Fixed Exchange Ra e
Dis u bance E ec
3 3 c Dis u bance E ec
3 c 3 R
3BC — + 3 Be — —
3 7 + 3 ' +
3c 0 0 3c +
Solu ion o Model I
In a wo- ie exchange egime wi h in e es income epa ia ed a
he comme cial exchange a e, an open-ma ke pu chase o bonds, 3 Bc
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Two-Tie Exchange Ra es and Mone a y Au onomy 59
in e es a e. Since he subs i u ion e ec domina es he weal h e ec ,
he domes ic in e es a e will ise.
This esul di e s om ha in low models which show ha wo- ie
exchange a es o ally insula e he domes ic in e es a e om exoge-
nous dis u bances in he o eign a e when domes ic and o eign bonds
a e pe ec ly subs i u able.10 The di e en esul s he e should no be
su p ising. The ac ha he small open economy canno insula e i sel
comple ely i om ou side dis u bances is inhe en in he po olio-balance
app oach o modeling he asse ma ke s.
Diag amma ically, an inc ease in he o eign in e es a e can be
shown as a igh wa d shi in he FF schedule. (See igu e 4). As a
esul , weal h holde s swi ch hei demand om domes ic bonds and
money o o eign bonds, pu ing upwa d p essu e on he in e es a e
and upwa d p essu e on he inancial exchange a e: he excess sup-
10 See, o example, A gy-Po e (1972), p. 515.
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60 Nancy Pe eg ini Ma ion
plies o domes ic bonds and money shi he BB cu e upwa ds and he
LL cu e downwa ds. The p essu es s op only when he e ec i e e-
u ns on bo h bonds a e equalized. The new equilib ium occu s a a
poin like b in igu e 4, a a highe in e es a e and a dep ecia ed
inancial exchange a e. As he inancial a e dep ecia es, weal h hol-
de s expe ience capi al gains on hei o eign bond holdings so ha
hey a e inclined o inc ease hei demands o domes ic bonds and
money, pu ing downwa d p essu e on BB and some upwa d p essu e
on LL. Bu again, hese shi s due o weal h e ec s a e mo e han o se
by he shi s due o subs i u ion e ec s.
Wi h pe ec subs i u abili y, an inc ease in he o eign in e es a e
leads o an inc ease in he domes ic e u n on o eign bonds as well.
Bu he e ec i e e u n on o eign bonds will now be lowe o do-
mes ic esiden s han o o eigne s.
A de alua ion o he comme cial exchange a e, like an inc ease in
he o eign in e es a e, unambiguously inc eases he domes ic in e es
a e, dep ecia es he inancial a e, and keeps he e ec i e a es o
e u n on home and o eign bonds equalized o domes ic weal h hol-
de s. A e he de alua ion, he e ec i e a e o e u n on o eign
bonds is g ea e o domes ic esiden s han i is o o eigne s.
Model II wi h Pe ec Subs i u abili y
In Model II, one disco e s ha wi h pe ec subs i u abili y be ween
domes ic and o eign bonds, an expansiona y mone a y policy dep e-
cia es he inancial a e bu canno al e he domes ic in e es a e.
Since e ec i e a es o e u n o bo h bonds mus emain equal a
all imes, , he e ec i e e u n on domes ic bonds, canno di e ge om
, he e ec i e e u n on o eign bonds. Diag amma ically, his s a e-
men means ha he FF cu e is ho izon al a = ?'.
No only a e he au ho i ies unable o al e he domes ic in e es
a e h ough an open-ma ke ope a ion, bu hey a e unable o insula e
he domes ic in e es a e, e en minimally, om ou side shocks, such
as a change in he o eign in e es a e. By implica ion, a wo- ie ex-
change egime segmen ed as in Model II does no g an in e es - a e
au onomy when domes ic and o eign bonds a e pe ec subs i u es.
Mo eo e , nei he a uni a y lexible exchange a e no a uni a y
ixed exchange a e gi es any au onomy o e he domes ic in e es
a e when domes ic and o eign bonds a e pe ec subs i u es. (In ac ,
he impac e ec s o Model II and he uni a y lexible exchange a e
a e iden ical).
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Two-Tie Exchange Ra es and Mone a y Au onomy 61
A wo- ie exchange ma ke which channels in e es income h ough
he comme cial ma ke s ands ou as unique; i allows he au ho i ies
o egula e ne capi al lows independen ly o he ela i e a es o e-
u n a home and ab oad and hus allows he au ho i ies some sho -
un in e es - a e au onomy, e en in he case o pe ec subs i u abili y
be ween domes ic and o eign bonds.
Appendix I
Two-Tie Exchange Ma ke — Model I
Impac E ec s
Asse -Ma ke Equa ions:
B — Bc — b ( , u) Wh = 0
Be + eR - Wc - I ( , u) Wh = 0
(1)
(2)
whe e
T
Wh = (B - Be) + (Be + eR- Wc) + eFh = Whs + Fh e d
u = — '
e
- b wh bu wh
- bFh d
- i wh iu wh
- IFh de
(a)
(b)
Di e en ia ed:
3 Be + Wh bu 3 + Wh bu 3 e + b 3 R
-3 Be + Wh lud ' + Wh lu 'de
- (1 - 1)3 R
De e minan = D1 = - b
Wh
[lu '
Wh
-
IFh]
+ l
Wh
[bu '
Wh
-
bFh]
> 0
T ace = - b
Wh
+ lu '
Wh
-
IFh
< 0
D 3 = 3 Be [lu Wh + bu
'
Wh - IFh _ ^ph] + $ ' [Wh Fh (lu b - bu I)]
+ 3 e[ whFh (lub -bul)] + dR [- bFh + bu Wh (1 - I) + lu 'Whb]
D1-de = dBc [(b + l ) Wh] + d [(l bu - lu b ) Wh Wh]
+ 3 e [(l bu - lu b ) Wh Wh '] + 3 R [(1 -
Z)
b Wh + l b W*]
No e: 3
Whs
= ¿3 R
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62 Nancy Pe eg ini Ma ion
Appendix II
Two-Tie Exchange Ma ke — Model II
Asse -Ma ke Equa ions:
(1)
(2)
whe e
(a)
<b>
Di e en ia ed:
B - Be -b( , u) Wh =
0
Bc + èR-Wc -l
( ,
u) Wh
= 0
T
Wh
=
W^
+
Fhèd
o
u = '
b Wh - bFh
3
l Wh - IFh
3 e
dB* + buWhd ' + bdR + bdFh
- 3 BC + lu Wh 3 + (- 1 + l) 3 R + l 3 Fh
De e minan =
D2 = (b l - l b) Fh
W* > 0
T ace = -b Wh- IF* < 0
D2d = dBc[-{b + l) Fh]
+ 3
[(blM -
lbu) Fh Wh]
+
3
R[- bFh]
+ 3
Fh
[0]
D2
.
3 e = 3
Bc [(b + l ) Wh] +
3
[(Z
bu - bT lu) Wh Wh]
+
3
R [ + b) b Wh + bl Wh]
+ 3
Fh
[(l b -
b l) W
No e:
dWhs = èdR + ed Fh
Appendix III
Uni a y Flexible Exchange Ra e
Asse -Ma ke Equa ions
(1)
b - Be -b
( ,
u) Wh
= 0
(2)
Bc + eR — Wc — I
( ,
u)Wh =
0
whe e
(a)
Wh = (B - Be) + (Bc + eR - Wc) + eFh
(b)
u =
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Two-Tie Exchange Ra es and Mone a y Au onomy
Di e en ia ed:
b Wä - bFÄ 3 3 B^ + bu W*
3
' + b
3
W*
l W* - IF* 3 e -
3
R +
lM
W*
3
+ I
3
W*»
De e minan = D3 = (b I - l b) Fh Wh > 0
T ace = - bT W* - IFh < o
D3
• 3
=
3
Be [- (b + i)
F><]
+
3
' [(blM - lbM) F^ W*]
+ 3 [0]
D3
•
3 c =
3
Be l(b + lT) W'<] +
3
[(l bu - b lu) W Wh]
+ 3 W e [(- b
I
+ l b)
W*>]
No e: 3 Whs = ed Fh
Appendix IV
Uni a y Fixed Exchange Ra e
Asse -Ma ke Equa ions
(1) B
—
Bc
—
b
( ,
u) W* =
0
(2) Bc + eR
—
Wc
—
I
( ,
u) W* = 0
whe e
(a) Wh = (B - Be) + (Bc + eR - W*) + eF>*
(b) u =
Di e en ia ed:
3 Be + bu W*
3
' + b 3 W^ + bFh 3
-
3
Be + lu w*
3
' + 3 W*« + IF*
3 <
De e minan = D4 = b Wh > 0
T ace = - b W* - 1 < 0
D4
• 3
=
3
Bo [- 1] +
3
[ - bu Wh] + 3 e [- bF*]
+ 3 W*» [- b]
D4
•
e
3
R =
3
Be [- (b + l ) W*] +
3
[(b lu -
bM
l ) W* W*]
+
3
e [(b
I
- l b) F^ W*] + [(b
I
- l b) W&]
b W* 0
•l W* -1
3
— êd R
No e: 3 W^ = ê 3 R
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64 Nancy Pe eg im Ma ion
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