tailieunhanh - WORKING PAPER NO 10 TWO-COUNTRY STOCK-FLOW-CONSISTENT MACROECONOMICS USING A CLOSED MODEL WITHIN A DOLLAR EXCHANGE REGIME

Options are not usually granted over the total value of the firm, but over the value of the firm’s equity (., the stock price). There are two ways to increase stock price volatility, and hence stock options value. The first is to take on riskier projects (., to increase risk on the left-hand side of the firm's balance sheet at market values). The second is to increase leverage of the firm (., to increase risk on the right-hand side of the balance sheet). If firms are at an optimal capital structure, deviations from that optimum are not value-creating and may. | WORKING PAPER NO 10 TWO-COUNTRY STOCK-FLOW-CONSISTENT MACROECONOMICS USING A CLOSED MODEL WITHIN A DOLLAR EXCHANGE REGIME WYNNE GODLEY MARC LAVOIE The Working Paper is intended as a means whereby researchers thoughts and findings may be communicated to interested readers for their comments. The paper should be considered preliminary in nature and may require substantial revision. Accordingly a Working Paper should not be quoted nor the data referred to without the written consent of the author. All rights reserved. 2003 Wynne Godley Marc Lavoie Comments and suggestions would be welcomed by the authors. e-mail Wynne Godley wynnegodley@ 2 TWO-COUNTRY STOCK-FLOW-CONSISTENT MACROECONOMICS USING A CLOSED MODEL WITHIN A DOLLAR EXCHANGE REGIME Wynne Godley CERF University of Cambridge Marc Lavoie Department of Economics University of Ottawa November 20031 1. INTRODUCTION This paper presents a dynamic model of a world comprising two economies each with its own currency which enjoy free trade with one another in both merchandise and financial assets. The various domestic and foreign assets are however imperfect substitutes. The pathbreaking paper which introduced the genre is Tobin and Macedo 1980 . A similar construction was proposed by Branson and Henderson 1985 and recapitulated in a review of exchange rate theory by Isard 1995 . These studies took supplies of bonds on the open market as exogenous and concentrated entirely on the way in which a timeless equilibrium exchange rate could be determined via resolution of a confrontation between demands and supplies of internationally tradeable assets. A fortiori they ignored the way in which exchange rates once determined in asset markets feed back so as to change relative prices and therefore trade flows - and thence the demand for and supply of assets income flows and so back to exchange rates themselves. Nor did they consider alternative closures in which the exchange rate is taken as exogenous and some other .