Page 195 - DECO503_INTERNATIONAL_TRADE_AND_FINANCE_ENGLISH

Unit 16 : Theories of Determination of Exchange Rate (Portfolio and Balance of Payments)

16.6 Key-Words Notes

1. Portfolio approach : An approach to explaining exchange rates that stresses their role in changing
the proportions of different currency-denominated assets.
A grouping of financial assets such as stocks, bonds and cash equivalents,
as well as their mutual, exchange-traded and closed-fund counterparts.
Portfolios are held directly by investors and/or managed by financial
professionals.
16.7 Review Questions

1. What do you mean by portfolio? Discuss portfolio approach.
2. Discuss the theory to determine exchange rate .
3. Write a short note on the balance of payment theory.
Answers: Self-Assessment
1. (i)(d) (ii)(a) (iii)(a)
(iv)(c) (v)(c) (vi)(e)
16.8 Further Readings

1. Dornbusch, Rudiger and Stanley Fischer (1980). \Exchange Rates and the Current
Account." American Economic Review 70, 960 {71.
2. Frenkel, Jacob A. and Michael L. Mussa (1985). \Asset Markets, Exchange Rates,
and the Balance of Payments: The Reformulation of Doctrine." See Jones and
Kenen (1985), pp. 679{747.
3. Isaac, Alan G. (1989). \Wealth E_ects and the Current Account with Endogenous
Terms of Trade." Journal of Macroeconomics 11(4), xxx.
4. Jones, Ronald W. and Peter B. Kenen, eds. (1985). Handbook of International
Economics, Volume 2. Amsterdam: North Holland Publishing Co.
5. Kenen, Peter (1985). \Macroeconomic Theory and Policy: How the Closed
Economy was Opened." See Jones and Kenen (1985), Chapter 13, pp. 625{677.
6. Kouri, Pentti J.K. (1976, May). \The Exchange Rate and the Balance of Payments
in the Short Run and the Long Run: A Monetary Approach." Scandinavian Journal
of Economics 78(2), 280{304.

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