FAN Yanhui:Capital Flow and Exchange Rate Volatility in An Unsymmetrical Two-country Model

Abstract：This paper examines how the assets adjustment behaviors of investors in the developed country influence nominal exchange rate volatility in less-developed country.It is found that in a risky world with flexible exchange rates, open capital account, and investors' lagging assets adjustment, the less-developed country would see its currency appreciate under the shock of product volatility of developed country.If the product volatility shock of developed country lead to an increase of product volatility in less-developed country, then whether the currency of less-developed country appreciates or not depends on whether the increase of product volatility in less-developed country is lower than that of developed country.Furthermore, the more investors in developed country care about wealth and social status, the more it would aggravate the exchange rate volatility of less-developed country.

Key words： Unsymmetrical Two-country Model    Capital Flows    Exchange Rate Volatility

source:Finance & Trade Economics ,No.2,2015