Stock markets and the real exchange rate: An intertemporal approach

We study the role of financial markets in the dynamics of the real exchange rate. To do so, we develop a model with stock markets, and we derive a closed-form solution for the real exchange rate. This solution stresses that a country's financial structure affects its real exchange rate, as well as the volatility of this exchange rate. We also contrast other implications of the model with the Balassa–Samuelson effect and with the prediction of traditional Keynesian models.