An Intertemporal Model of the Real Exchange Rate, Stock Market, and International Debt Dynamics: Policy Simulations

20 Pages Posted: 5 Nov 2006

See all articles by Saziye Gazioglu

Saziye Gazioglu

Robert Gordon University - Aberdeen Business School

W. David McCausland

University of Aberdeen - Business School

Date Written: January 2005

Abstract

This paper develops an open economy intertemporal optimising model that seeks to analyse the effect of bill financed government expenditure on several key financial markets. The main results suggest that an increase in bill financed government expenditure leads to a rise in net international debt, a fall in the domestic real exchange rate and a fall in the stock market value. Furthermore, due to the presence of non-linearities in the model, reversing the deficit financing policy doesn't restore the initial net international credit, high stock market value state. Instead, the country finds itself stuck in an international debt and low stock market value trap.

Keywords: stock market, international debt, the real exchange rate

JEL Classification: E60, F40, G15, H60

Suggested Citation

Gazioglu, Saziye and McCausland, W. David, An Intertemporal Model of the Real Exchange Rate, Stock Market, and International Debt Dynamics: Policy Simulations (January 2005). Available at SSRN: https://ssrn.com/abstract=942292 or http://dx.doi.org/10.2139/ssrn.942292

Saziye Gazioglu

Robert Gordon University - Aberdeen Business School ( email )

Garthdee Road
Aberdeen AB10 7QE
United Kingdom

W. David McCausland (Contact Author)

University of Aberdeen - Business School ( email )

Edward Wright Building
Dunbar Street
Old Aberdeen AB24 3QY, Scotland AB24 3QY
United Kingdom

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