The stock market and exchange rate dynamics

By Michael A. Gavin. 1986

Abstract This paper articulates a model of the open economy in which, as in Tobin (1978), the price of shares in the stock market subtitutes for the real interest rate in the determination of aggregate demand. The stock market reduces the impact of monetary policy on the real exchange rate; indeed, if the link between stock prices and aggregate demand is important enough, the impact of monetary policy on the real exchange rate can be reversed. In contrast with standard, dynamic Mundell-Flemming models, anticipated fiscal policy can be expansionary rather than contradictionary as in, for example, Burgstaller (1983), Blanchard (1984), and Branson et al (1985).

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Citations in the corpus

Multistep Neural Networks for Data-driven Discovery of Nonlinear Dynamical Systems (2018, background): “In this setting, one may be only able to postulate crude and potentially overly simpliﬁed models based on a given a set of empirical observations (see e.g., models for tumor growth [2], social dynamics [3], and the stock market [4]).”
On the Linkages between Stock Prices and Exchange Rates: Evidence from the Banking Crisis of 2007-2010 (2014, unknown): “Another channel for this type of causality stems from the demand for money (Gavin, 1989).”
Dynamic Relationship between Stock Prices and Exchange Rates: Evidence from Three South Asian Countries (2009, background): “Thus actual exchange rate has to be determined by expected future exchange rates (see Gavin, (1989) ).”
EFFECT OF EXCHANGE RATE VOLATILITY ON THE GHANA STOCK EXCHANGE (2008, background): “First, the “Flow-Oriented” model (Dornbusch and Fischer, 1980 and Gavin, 1989) – in which exchange rate movement affects output levels of firms and also the trade balance of an economy.”
Price and Volatility Spillovers between Stock Prices and Exchange Rates: Empirical Evidence from the G-7 Countries (2004, background): “Innovations in the stock market, on the other hand, affect aggregate demand through wealth and liquidity effects, thereby influencing money demand and exchange rates (Gavin, 1989).”