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The applicability of the portfolio balance model of exchange rate determination to the Australian dollar


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Hopkins, S 1992 , 'The applicability of the portfolio balance model of exchange rate determination to the Australian dollar', PhD thesis, University of Tasmania.

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Two issues represent a substantial and continuing challenge to the central bank of a
small open economy. The first relates to the correct identification of the 'mix of
domestic and external influences on the exchange rate. Correct identification is a
first step toward the formulation of a coherent domestic commercial policy: one
which provides desired domestic and external policy outcomes. The second requires
a clear understanding of the mechanisms of control; the channels of influence open
to the central bank if they are able to meet policy targets.
In order to address these two issues, the analysis develops a portfolio balance model
of exchange rate determination incorporating the role of central bank foreign
exchange market intervention behavior. The portfolio balance model is a short term
one, restricted to periods of less than one year where the exchange rate is viewed as
an asset price influenced by changes in the demand and supply of domestic money,
domestic and foreign currency denominated financial assets. Incorporation of central
bank behaviour into the model expands a private sector driven view of exchange rate
determination into one where there is a role for both private and public sector foreign
exchange market behaviour.
A further issue, which builds on the first mentioned above, is the impact of public
sector behaviour on private sector participants in the exchange rate determination
process. The relationship between the two sets of participants in the foreign exchange
market - public and private - is reflected in the effects of central bank intervention
on the decisions made by private sector investors. The risk premium required by for example, foreign investors holding a domestically denominated asset may alter with
central bank action in the foreign exchange market The influence of intervention
activity is not confined to the relationship between central bank intervention and the
foreign exchange risk premium but also to the more fundamental issue of whether
there is a risk premium or not.

Item Type: Thesis - PhD
Authors/Creators:Hopkins, S
Keywords: Foreign exchange
Copyright Holders: The Author
Copyright Information:

Copyright 1992 the Author - The University is continuing to endeavour to trace the copyright
owner(s) and in the meantime this item has been reproduced here in good faith. We
would be pleased to hear from the copyright owner(s).

Additional Information:

Thesis (Ph.D.)--University of Tasmania, 1994. Includes bibliographical references (leaves [236]-249)

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