ABSTRACT
In Chapters 8-10, we specified the various financial markets that are contained in this model of the world economy and analyzed how equilibrium in each market is affected by changes in the spot rate and other variables. In the present chapter, we first sum across the budget constraints facing the sectors in the home country. From the resulting ·community· constraint facing the home country, we are able to show that whenever the markets for home-country checkable deposits, home-country bonds, and the spot market are in equilibrium simultaneously, so is the market for the home-country's currency - provided that the forward market for foreign exchange cleared in the immediately preceding period. Next, we sum across the foreign sectors' budget constraints. The resulting community constraint facing the foreign country indicates that whenever the markets for foreign-country checkable deposits, foreign-country bonds, and the spot market are in equilibrium simultaneously, so is the market for the foreign country's currency - provided that the forward market for foreign exchange cleared in the immediately preceding period. Finally, we sum across the budget constraints of all the sectors of the world economy. From this worldwide restriction, the worldwide counterpart of Walras's Law, we are able to show that at most five of the excess demands for home-and foreign-country checkable deposits, home-and foreign-country bonds, and home-and foreign-country currency are linearly independent - provided that the forward market for foreign exchange cleared in the immediately preceding period. In addition, we show the equivalence among appropriately modified versions of the Keynesian, asset, and foreign exchange market approaches to the (zero ex ante overall) balance of payments (or exchange rate determination) between the home and foreign countries.
