Model with foreign debt determining the exchange rates

Hi all, do you know any theoretical model in which foreign debt determines the exchange rate? or at least have an impact on exchange rates?

I am not sure what you mean. Could you please elaborate?

Dear Pfeifer, I am trying to construct a model that tries to explain the effects of capital flows on developing economies. I am trying to build a model in which when there are excess capital inflows (in the form of foreign debt), the exchange rate decreases. In my search of the literature, I observed that exchange rates are determined by export- import relations only. I was wondering whether there exists any model that takes capital flows into account in the definition of exchange rates. Or is it possible to include capital flow fluctuation’s effects on the exchange rate into the model?

National accounting tells us that a trade deficit always requires capital imports. Thus, it is not true that only imports/exports determine the exchange rate. It is always both.

To be more accurate. I am working on MXN model. ( Schmith-Grohé and Uribe open economy macro book chapter 8 ). There exists three production sectors: importable goods, exportable goods and nontradable goods. Exportable goods and importable goods are combined with a CES production function and constructs composite tradable goods. Finally, final goods are produced with another CES production function using composite tradable goods and nontradable goods. The price of tradable composite good in terms of final goods interpreted to be the real exchange rate. Thus it seems to me it does not take into account foreign debts. Am I correct or implicitly does it take into account capital account as well?

one more question is regarding this topic:


As I stated here, I couldnt replicate the model. The mod file attached in this topic is my attempt to calibrate model. But then I tried with the same calibration as Schmith-grohé and it didnt work as well.
I am attaching the mod ile below.
They provided the replication files here: http://www.columbia.edu/~mu2166/book/rer/
I checked and that seems to work fine. However in dynare, I couldnt replicate.

There are two things I would like to ask. First they take price of nontrable goods and price of importable goods as given and get these from a get distance matrix command. When I alter these prices the residuals of static equations diminish but never reaches 0.
Secondly, at the end of the steady state m file, there exist a command like this:

eq53 = -ptau + CHITAU *(atau/B)^(-1/MUTN);

eq36 = -syn + pn*yn/y;

dist = norm([eq53 eq36]);

ptau is the price of tradable composite goods and pn is the price of nontradable goods. they defined a norm between these.

Can either of these be the problem I cannot replicate the model in dynare? I checked the equations many times and couldnt find where I am making mistake.

Finally, I tried to work my mod file with steady(nocheck command but irf does not converge to zero. SGU irfs does not also converge would it be a problem?

Many many thanks

mxnbnm.mod (14.7 KB)

Sorry I attached my calibration by mistake. Calibration a la SGU is attached below.

mxn.mod (17.7 KB)