An Equilibrium Theory of Nominal Exchange Rates

This paper proposes an equilibrium theory of nominal exchange rates, which offers a new perspective on various issues in open economy macroeconomics. The rate and portfolio choices are jointly determined equilibrium, thus providing approach to overcoming the indeterminacy results Kareken Wallace (1981). distinctive features this that is international financial markets, risk premium UIP deviations fully endogenous objects real inherits its properties from rate. In terms policy, novel implies country with peg free asset mobility faces tetralemma not trilemma, because it loses only monetary policy independence but also fiscal independence.