In this article we construct a simple open-economy macro model to examine how capital flows, monetary policy and dividend policies of firms influence asset prices, economic activity and inflation. In this model, we consider a three-asset framework based on domestic money, domestic equity and foreign bonds under flexible exchange rate. The model is based on the assumptions of imperfect asset substitutability and absence of sterilization. The model also incorporates an aggregate supply function in the presence of wage indexation. The model can apply to a large class of emerging market economies which have embarked on a programme of liberalization of the financial sector in general and stock market in particular.
AndoAlbertModiglianiFranco (1963). The life cycle hypothesis of saving: Aggregate implications and tests. American Economic Review, 53(1): 55–84.
2.
BakerKent H.PowellGary E. (2000). Determinants of corporate dividend policy: A survey of NYSE firms. Financial Practice and Education, 10(1): 29–40.
3.
BaumolWilliam (1965). Stock market and economic efficiency. New York: Fordham University Press.
4.
BekaertGeertHarveyCampbell R. (2000). Capital flows and behavior of emerging market equity returns. InEdwardsSebastian (Ed.), Capital flows and emerging economies: Theory, evidence, and controversies (pp. 159–194). Chicago, IL: University of Chicago Press, http://www.nber.org/books/edwa00-1 (accessed on 20 October 2012).
5.
BlanchardOliver (1981). Output, the stock market, and interest rates. American Economic Review, 71(1): 132–143.
6.
BosworthBarry (1975). The stock market and the economy. Brookings Papers on Economic Activity, 6(2): 257–300.
7.
BrainardWilliam C.TobinJames (1968). Econometric models: Their problems and usefulness: Pitfalls in financial model building. American Economic Review, 58(2): 99–122.
8.
CalvoGuillermo A.LeidermanLeonardoReinhartCarmen M. (1993). Capital inflows and real exchange rate appreciation in Latin America: The role of external factors. IMF Staff Papers, 40(1): 108–151.
9.
CorboVittorioHernandezLeonardo (1994). Macroeconomic adjustments to capital inflows: Latin American style versus East Asian style. World Bank Policy Research Working Paper 1377, Washington, DC.
10.
ChinnMenzie D.DooleyMichael P. (1995). Asia-Pacific capital market: Integration and implications for economic activity. NBER Working Papers 5280. National Bureau of Economic Research, Cambridge, MA.
11.
DornbushRudigerFisherStanley (1980). Exchange rates and current account. American Economic Review, 70(5): 960–971.
12.
Economic Survey(2011–2012). Government of India. New Delhi: Oxford University Press.
13.
EdwardsSebastian (2001). Capital mobility and economic performance: Are emerging economies different?NBER Working Papers 8076, National Bureau of Economic Research, Cambridge, MA.
14.
GavinMichael (1989). The stock market and exchange rate dynamics. Journal of International Money and Finance, 8(2): 181–200.
15.
KhanMohsin S.ReinhartCarmen M. (1995). Capital flows in APEC region. IMF Occasional Paper 122, International Monetary Fund, Washington D.C.
16.
LintnerJohn (1956). Distributions of incomes of corporations among dividends, retained earnings and taxes. American Economic Review, 46(2): 97–113.
17.
PruittStephen W.GitmanLawrence J. (1991). The interactions between the investment, financing, and dividend decisions of major US firms. Financial Review, 26(3): 409–430.
18.
TobinJames (1969). A general equilibrium approach to monetary theory. Journal of Money, Credit and Banking, 1(1): 15–29.
19.
Van WijnbergenSweder (1983a). Credit policy, inflation and growth in a financially repressed economy. Journal of Development Economics, 13(1–2): 45–65.
20.
Van WijnbergenSweder. (1983b). Interest rate management in LDC’s. Journal of Monetary Economics, 12(3): 433–452.
