REAL EFFECTS OF EXCHANGE-RATE VOLATILITY

In the presence of exchange rate volatility and internationally differing rates of time preference investment in the stock of domestic capital is shown to proceed beyond, or to fall short of, the point where the marginal productivity equals the respective rate of time preference. If the national rate of time preference is comparatively low (high) the respective country winds up as a creditor (debtor) internationally. Upon an increases in exchange rate volatility domestic capital of a debtor country (creditor country) decreases (increases). The long-run effect of increased exchange rate volatility on the trade balance cannot be determined unequivocally.