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
JEL-Classification-Number:
Creation-Date: April 1986
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