International macroe.. - Free

Chapter 1Some InstitutionalBackgroundThis chapter covers some institutional background and develops somebasic relations that we rely on in international macroeconomics andÞnance. First, you will get a basic description some widely held internationalÞnancial instruments and the markets in which they trade.This discussion allows us to quickly derive the fundamental parity relationsimplied by the absence of riskless arbitrage proÞts that relate assetprices in international Þnancial markets. These parity conditions areemployed regularly in international macroeconomic theory and serveas jumping off points for more in-depth analyses of asset pricing in theinternational environment. Second, you’ll get a brief overview of thenational income accounts and their relation to the balance of payments.This discussion identiÞes some of the macroeconomic data that we wanttheory to explain and that are employed in empirical work. Third, youwill see a discussion of the central bank’s balance sheet—an understandingof which is necessary to appreciate the role of international (foreignexchange) reserves in the central bank’s foreign exchange market interventionand the impact of intervention on the domestic money supply.1