SFB 303 Discussion Paper No. B - 34
Author: Welsch, H.
Title: A Model of Exchange Rates and Foreign Trade for Nine OECD Countries
Abstract: Foreign trade and financial flows constitute the basic economic linkages between national economies.
They depend on national economic variables like income, price levels and interest rates as well as on the
conversion factors by which the variables of the individual countries are related, namely exchange rates.
Conversely, national economic variables and exchange rates are influenced by the flows of commodities,
services and capital.The present paper is concerned with two elements of this interdependent system: exchange
rates and foreign trade. The model to be presented here is a part of the econometric world model presently under
construction within the Bonn-IIASA Research Project on Economic Growth and Structural Change. The basic
features of the exchange rate and foreign trade model as well as of the total model can be seen from the research
plan of this project, see Krelle (1985).With respect to foreign trade it is planned to model not only aggregate
imports and exports but also to disaggregate them according to both, country of origin or destination,
respectively, and commodity groups. At present, estimation equations have been established only for aggregate
imports and exports and their respective prices. According to the top-down principle adopted in the research plan
this constitutes the basis for the two types of disaggregation just mentioned.In this paper the model of exchange
rates and of aggregate foreign trade for the following countries is presented: USA, Federal Republic of Germany,
Japan, France, United Kingdom, Italy, the Netherlands, Belgium/Luxembourg and Canada. For these countries
exchange rates are modelled as equilibrium exchange rates, i.e. they are determined by the condition that the
foreign exchange markets be cleared. Real exports and imports of goods and services are modelled by export and
import demand functions whereas the corresponding prices are determined from the supply side.
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Creation-Date: 1985
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