Abstract
International linkages among markets for goods, capital and foreign exchange play a key role in the process of exchange rate determination. The nature of the equilibrium implied by these linkages and the speed with which this equilibrium is attained have important implications for the ability of governments to pursue independent domestic stabilisation policies. There is little dispute about the proposition that the more integrated the international markets the greater is the prospective difficulty in pursuing independent domestic monetary policies. For example, if financial (capital and foreign exchange) markets around the world are highly integrated, then perfectly mobile cross-border capital flows would force a convergence of the expected real rates of return on identical assets denominated in different currencies. Consequently, currency denomination would become largely irrelevant to borrowing and lending decisions. If this proposition is valid, then domestic monetary policy will have no effect on the expected real rate of interest faced by borrowers and lenders.
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© 1997 Imad A. Moosa and Razzaque H. Bhatti
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Moosa, I.A., Bhatti, R.H. (1997). Introduction. In: International Parity Conditions. Palgrave Macmillan, London. https://doi.org/10.1007/978-1-349-25523-8_1
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DOI: https://doi.org/10.1007/978-1-349-25523-8_1
Publisher Name: Palgrave Macmillan, London
Print ISBN: 978-1-349-25525-2
Online ISBN: 978-1-349-25523-8
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