Exchange rate instability in a two-country portfolio balance model |
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| Affiliation: | 1. School of International Trade and Economics, Central University of Finance and Economics, China;2. Owen Graduate School of Management, Vanderbilt University, USA;3. School of International Economics and Trade, Nanjing University of Finance & Economics, China;1. School of Management, China Institute for Studies in Energy Policy, Collaborative Innovation Center for Energy Economics and Energy Policy, Xiamen University, Fujian, 361005, China;2. Center for African Development Strategy (CFADS), 1000 Monrovia, 10 Liberia |
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| Abstract: | This paper considers the question of Walrasian stability in the context of a two-country model in which gross substitutability is assumed and negative net foreign asset positions are ruled out. It demonstrates that these assumptions neither guarantee stability nor guarantee that an increase in the factors deemed destabilizing (stabilizing) in the literature will not in fact turn out to be stabilizing (destabilizing). However, it derives a condition which guarantees stability, pointing out that this condition is more plausible than certain “smallness” assumptions which have performed a similar function in portfolio balance models. |
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