Generalise the model in this chapter to allow for a bond market, in which households can hold
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Generalise the model in this chapter to allow for a bond market, in which households can hold either or both of two bonds with fixed nominal ﴾face﴿ value: a domestic bond, with fixed price B, paying a known interest rate, r, for loans in period 0, repayable ﴾with certainty i.e without default risk﴿ at time 1, and the same type of foreign currency instrument, priced at B* in terms of foreign currency, and paying an interest rate of r*. In the process, derive both CIRP, and a version of UIRP incorporating a risk premium.
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Exchange Rates and International Finance
ISBN: 978-0273786047
6th edition
Authors: Laurence Copeland
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