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| Author: | Betts, C. M. Smith, B. D. |
| Title: | Money, banking, and the determination of real and nominal exchange rates |
| Journal: | International Economic Review
1997 : AUG, VOL. 38:3, p. 703-734 |
| Index terms: | BANKING MONEY EXCHANGE RATES CURRENCY |
| Language: | eng |
| Abstract: | This paper develops a two-country model in which spatial separation and limited communication create a role for money and in which stochastic relocation, which acts like a liquidity preference shock, creates a role for banks. Spatial separation permits permanent deviations from purchasing power parity to be observed, so that the real exchange rate can differ from one. Monetary factors are important determinants of the real exchange in this environment. The equalibrium value of the real exchange rate affects the demands for each of the currencies at each date so that changes in money supply conditions necessitate corresponding changes in the real rate of exchange. |
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