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

Saziye Gazioglu, W David McCausland

Research output: Contribution to journalArticle

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.
Original languageEnglish
Pages (from-to)73-88
Number of pages16
JournalEkonomia
Volume7
Issue number2
Publication statusPublished - 2005

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Keywords

  • stock market
  • international debt
  • the real exchange rate

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