NATIONAL BUREAU OF ECONOMIC RESEARCH
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Stochastic Equilibrium and Exchange Rate Determination in a Small Open Economy with Risk Averse Optimizing Agents

Earl L. Grinols, Stephen J. Turnovsky

NBER Working Paper No. 3651
Issued in March 1991
NBER Program(s):International Trade and Investment, International Finance and Macroeconomics

This paper constructs a stochastic general equilibrium model of a small open economy consisting of risk averse optimizing agents. The stochastic processes describing the rate of monetary growth, government expenditure, private production, and the foreign price level are taken to be exogenous, determining all asset risks and returns, and the equilibrium stochastic processes describing the domestic inflation rate and the exchange rate. The model is used to examine a number of issues. These include: (i) the effects of the means and variances of policy shocks on the equilibrium; (ii) the determinants of the foreign exchange risk premium; (iii) the relationship between net export instability and economic growth.

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Document Object Identifier (DOI): 10.3386/w3651

Published: Grinols, Earl L. and Stephen J. Turnovsky. "Exchange Rate Determination And Asset Prices In A Stochastic Small Open Economy," Journal of International Economics, 1994, v36(1/2), 75-97.

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