TY  - JOUR
AU  - Grilli,Vittorio
AU  - Roubini,Nouriel
TI  - Financial Integration, Liquidity and Exchange Rates
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 3088
PY  - 1989
Y2  - August 1989
UR  - http://www.nber.org/papers/w3088
L1  - http://www.nber.org/papers/w3088.pdf
N1  - Author contact info:
Vittorio U. Grilli
Ministero di Tesaro
Capo del Servizio T
via XX se tembre 97
Roma 00187 ITALY
Tel: 44/71/631-6407
E-Mail: Vittorio.grilli@tesoro.it

Nouriel Roubini
Department of Economics, KMC 7-83
Stern School of Business, New York University
44 West 4th Street
New York, NY  10012
Tel: 212/998-0886
Fax: 212/995-4218
E-Mail: nroubini@stern.nyu.edu
AB  - This paper presents a two-country extension of Lucas' (1988) work on the effects of cash-in-advance constraints in asset markets on the pricing of financial assets. The model is one where there exists some degree of separation between the goods markets and the asset markets and money is used for transactions in both markets. The main results of the paper are the following. First, the equilibrium level of the exchange rate depends on the share of money used for asset transactions: a greater share will correspond to a more appreciated exchange rate. Second, under uncertainty, liquidity effects deriving from stochastic shocks to bond creation lead to an "excess" volatility of nominal and real exchange rates even when the "fundamental" value of the exchange rate is constant. Third, capital controls in the form of taxes on foreign asset acquisitions tend to appreciate the exchange rate. Fourth, the maturity structure of the public debt affects the equilibrium exchange rate. In particular, a move towards a longer maturity structure will tend to depreciate the exchange rate.
ER  -