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An intertemporal model of the real exchange rate, stock market, and international debt dynamics: policy simulations

By Saziye Gazioglu and W. David McCausland

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

Topics: stock market, the real exchange rate, international debt
Publisher: University of Aberdeen Business School
Year: 2005
OAI identifier: oai:aura.abdn.ac.uk:2164/12

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