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Forward Rates, Interest Rates, and Expectations Under Alternative Exchange Rate Regimes

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  • PETER B. KENEN

Abstract

A model comprising spot and forward foreign exchange markets and a domestic credit market is used to examine the trade‐off between volatility in the nominal exchange rate and domestic interest rate. It also shows how a slowly crawling spot rate can raise interest rate volatility and the amplitude of reserve flows. Finally, the paper extends a finding by Driskill and McCafferty that the exchange rate effects of external shocks are differently affected by the responsiveness of speculation to expected profits; high responsiveness makes the spot exchange rate more sensitive to foreign financial shocks but less sensitive to trade balance shocks.

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  • Peter B. Kenen, 1985. "Forward Rates, Interest Rates, and Expectations Under Alternative Exchange Rate Regimes," The Economic Record, The Economic Society of Australia, vol. 61(3), pages 654-666, September.
    • Handle: RePEc:bla:ecorec:v:61:y:1985:i:3:p:654-666
    DOI: 10.1111/j.1475-4932.1985.tb02020.x
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    References listed on IDEAS

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    1. Dornbusch, Rudiger, 1982. "PPP Exchange-Rate Rules and Macroeconomic Stability," Journal of Political Economy, University of Chicago Press, vol. 90(1), pages 158-165, February.
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