Premium
International Interest Rates, Exchange Rates, and the Stochastic Structure of Supply
Author(s) -
BOYLE GLENN W.
Publication year - 1990
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.1990.tb03710.x
Subject(s) - economics , monetary economics , international fisher effect , currency , foreign exchange risk , interest rate , interest rate parity , exchange rate , bond , value (mathematics) , risk premium , commodity , econometrics , nominal interest rate , real interest rate , mathematics , statistics , finance
In a dual‐currency, flexible exchange rate model, both nominal and real foreign exchange premia depend on investor risk attitudes, consumption parameters, and the stochastic structure of currency and commodity supplies. When supplies are random, their joint correlation structure determines the sign of the premia. If the money supplies are identically distributed, then all foreign exchange premia, regardless of the currency of denomination, are zero. A positive correlation between the value of a country's currency and its nominal interest rate need not indicate real interest rate movements. Relative bond prices can be negatively correlated with the terms of trade.