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104 CHAPTER 3. THE MONETARY MODELwhereVar(∆s t )=σ² 2 + 2(1 − ρ)[1 + λ(1 − ρ)] 2 Var(z t).Why does the variance of the depreciation still not exceed the varianceof the fundamentals growth?
Chapter 4The Lucas ModelThe present-value interpretation of the monetary model underscores theideathatweshouldexpecttheexchangeratetobehavelikethepricesof other assets–such as stocks and bonds. This is one of that model’sattractive features. One of its unattractive features is that the modelis ad hoc in the sense that the money demand functions upon whichit rests were not shown to arise explicitly from decisions of optimizingagents. Lucas’s [95] neoclassical model of exchange rate determinationgives a rigorous theoretical framework for pricing foreign exchange andother assets in a ßexible price environment and is not subject to thiscriticism. It is a dynamic general equilibrium model of an endowmenteconomy with complete markets where the fundamental determinantsoftheexchangeratearethesameasthoseinthemonetarymodel.The economic environment for dynamic general equilibrium analysisneeds to be speciÞed in some detail. To make this task manageable,we will begin by modeling the real part of the economy that operatesunder a barter system. We will obtain a solution for the real exchangerate and real stock-pricing formulae. This perfect-markets real generalequilibrium model is sometimes referred to as an Arrow [3]—Debreu [34]model because it can be mapped into their static general equilibriumframework. We know that the Arrow—Debreu competitive equilibriumyields a Pareto Optimum. Why is this connection useful? Because ittells us that we can understand the behavior of the market economy bysolving for the social optimum and it is typically more straightforwardto obtain the social optimum than to directly solve for the market105
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CONTENTSvii11 Balance of Payments C
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2 CHAPTER 1. SOME INSTITUTIONAL BAC
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154 CHAPTER 5. INTERNATIONAL REAL B
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162CHAPTER 6. FOREIGN EXCHANGE MARK
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208 CHAPTER 7. THE REAL EXCHANGE RA
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230 CHAPTER 8. THE MUNDELL-FLEMING
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264CHAPTER 9. THE NEW INTERNATIONAL
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308 CHAPTER 10. TARGET-ZONE MODELSa
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310 CHAPTER 10. TARGET-ZONE MODELSt
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312 CHAPTER 10. TARGET-ZONE MODELSC
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314 CHAPTER 10. TARGET-ZONE MODELSl
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316 CHAPTER 10. TARGET-ZONE MODELST
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318 CHAPTER 10. TARGET-ZONE MODELSa
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320 CHAPTER 10. TARGET-ZONE MODELSM
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322 CHAPTER 10. TARGET-ZONE MODELSt
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324 CHAPTER 10. TARGET-ZONE MODELS
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326 CHAPTER 10. TARGET-ZONE MODELS
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328 CHAPTER 11. BALANCE OF PAYMENTS
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358 AUTHOR INDEXFama, E.F., 161, 16
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Subject IndexAAbsorption, 16, 230AI
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362 SUBJECT INDEXEfficient capital
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364 SUBJECT INDEXMethod of undeterm
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366 SUBJECT INDEXRisk neutrality, 9
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368 SUBJECT INDEXImpulse response a
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