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Volume :29 Issue : 3 2001      Add To Cart                                                                    Download

The Portfolio Balance Approach to Flexible Exchange Rate Determination (Branson’s Model)

Auther : Adnan Abbas Ali

This paper stresses the importance of the portfolio approach to exchange-rate determination. According to this approach, the exchange rate is determined, along with interest rates, in the short-run equilibrium process of financial markets, given supplies of domestic and foreign assets. The exchange rate in turn is a principal determinant of the current account in the balance of payments. The current account, with flexible exchange rates, is the net rate of accumulation of foreign assests, whose accumulation moves the exchange rate. This gives us, according to Branson, a dynamic system of exchange rate adjustment which includes assets markets, the current account, and foreign asset accumulation. It describes the pattern of short-run exchange rate adjustment around the long-run path given by relative price movements.

Keywords: Portfolio Balance Appoach, Exchange Rate, Nominal Exchange Rate, Real Exchange Rate, Equilibrium in Asset Market, Stock Equilibrium, Branson’s Model, Wealth, Portfolio Equilibrium, Portofolio Investment.

 

 

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