SFB 303 Discussion Paper No. B - 046

Author: Krelle,W., and H. Welsch
Title: Determination of exchange rates and capital flows for OECD countries
Abstract: The market economies grow together more and more to form one world economy. This is especially true for the OECD countries and among them for the EC countries. The increasing division of labor and the rising GDP per capita induce larger flows of commodities and capital between these countries. This in turn reinforces economic growth. Of course, prices and exchange rates codetermine the size and the direction of commodity and capital flows between countries. In this paper we present a model which determines simultaneously the volumes and prices of exports and imports of commodities and services of the most important OECD countries as well as the exchange rates of their currencies. The capital flows are derived from the difference of the values of exports and imports by considering the transfer payments, the net foreign capital and labor incomes and the changes in foreign currency reserves as exogenous. GDP and the domestic price levels are exogenous too. In the first section of the paper we state the basic framework of the system and give the estimated parameter values. We then derive the behavior equations. In the final section we present the solution of the whole model and give some forecasts.
Keywords: International trade, Exchange rates, Capital flow, Export, Import
Creation-Date: April 1986
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