Disscussion: Inflation and Foreign Exchange Rates Under Production and Monetary Uncertainty

Research in the field of international capital markets has grown considerably during the past few years. The growth of this research activity can be explained both in terms of the “need to know†motive, and the “extension of models†motive. The “need to know†motive reflects the changes in the international monetary system, and the international capital market in general since 1973. The introduction of flexible exchange rates among the major currencies, the sharp increase in both the rate and the volatility of world and relative currency inflation, and the radical changesin the relative price of at least one highly traded good—oil—have made it extremely important to gain a better understanding of the risk in the international market. The “extension of models†motive has to do with the natural interest in the field to extend and to test models developed in financial economics on a different, and important, set of problems.