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- Title
THE MYSTERY OF THE MULTIPLYING MARKS: A MODIFICATION OF THE MONETARY MODEL.
- Authors
Frankel, Jeffrey A.
- Abstract
The article proposes a solution simultaneously to the unexplained shifts in the U.S. money demand equation, German money demand equation, and mark/ dollar exchange rate equation. The proposal is simply to include wealth, in addition to income, as a transactions variable in the money demand function. A foreign current account surplus will redistribute wealth from domestic residents to foreign residents, simultaneously raising foreign money demand, lowering domestic money demand, and raising the exchange rate. Unlike in the portfolio-balance model, it does not matter if the current account is financed or even more than-financed by foreign exchange intervention. Foreign exchange intervention does not alter the level of private sector wealth, only its currency composition, and thus will not affect the demand for domestic or foreign money. Nor, if the intervention is sterilized, will it affect the supply of domestic or foreign money. It appears possible that the monetary model with wealth included succeeds in explaining the mark/dollar exchange rate during a period when the monetary approach without wealth and the portfolio- balance approach both fail.
- Subjects
UNITED States; GERMANY; DEMAND for money; ECONOMETRIC models; FOREIGN exchange rates; INCOME; REGRESSION analysis; ECONOMICS; PORTFOLIO management (Investments); UNITED States economic policy; GERMAN economic policy
- Publication
Review of Economics & Statistics, 1982, Vol 64, Issue 3, p515
- ISSN
0034-6535
- Publication type
Article
- DOI
10.2307/1925953