Exchange Rate Effects of Portfolio Shifts?

Malte Krüger, University of Western Ontario


Using the Branson model as an example, this paper seeks to clarify the role of interest rate and exchange rate changes in asset market models. Focusing on short- erm adjustments, it is shown that portfolio shifts mainly affect relative interest rates in different countries. Only to the extent that portfolio shifts lead to changes in the money demand or money supply, are exchange rates affected as well. The announcement of German monetary union in 1990 is used as an example to illustrate the relative significance of interest rate changes as shock absorbers.