ABSTRACT
In the present chapter we continue our discussion of the financial markets contained in our global economy model by combining the demands and supplies of non-interest-bearing assets into a competitive market for those non-interest-bearing assets denominated in the home country’s unit of account and a separate competitive market for those non-interest-bearing assets denominated in the foreign country’s unit of account. We then combine these equilibrium conditions and find, for a given spot rate, the locus of combinations of the forward rate and the bond rates on home and foreign bonds that produce equilibrium in both markets for non-interest-bearing assets simultaneously. Then we consider how changes in the spot rate and environmental factors affect the position of this locus.
