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Economic integration and the foreign exchange

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  • Enzo Weber

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Abstract

This paper demonstrates effects of economic convergence processes on the foreign exchange behaviour in a monetary modelling approach. Since the exchange rate represents the relative price of two currencies, commonness of stochastic trends between the fundamental determinants of supply and demand of the underlying monies restricts exchange rate movements to transitory fluctuations. In the spirit of optimal currency areas, this has the potential to serve as a criterion for an all-round integration of two economies. Empirically, such a constellation is found between Australia and New Zealand, whereas diverging trends in money and interest rates characterise the relation of Australia towards the US. Copyright Springer-Verlag 2013

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File URL: http://hdl.handle.net/10.1007/s10368-011-0202-3
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Bibliographic Info

Article provided by Springer in its journal International Economics and Economic Policy.

Volume (Year): 10 (2013)
Issue (Month): 2 (June)
Pages: 201-215

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Handle: RePEc:kap:iecepo:v:10:y:2013:i:2:p:201-215

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Web page: http://www.springerlink.com/link.asp?id=111059

Related research

Keywords: Monetary exchange rate model; Convergence; Stationarity; Australia; F31; F41; C32;

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  1. Frankel, Jeffrey A, 1979. "On the Mark: A Theory of Floating Exchange Rates Based on Real Interest Differentials," American Economic Review, American Economic Association, vol. 69(4), pages 610-22, September.
  2. Bernard, Andrew B & Durlauf, Steven N, 1995. "Convergence in International Output," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 10(2), pages 97-108, April-Jun.
  3. Enzo Weber, 2012. "Regional and outward economic integration in South-East Asia," Applied Economics, Taylor & Francis Journals, vol. 44(10), pages 1271-1283, April.
  4. Meese, Richard A. & Rogoff, Kenneth, 1983. "Empirical exchange rate models of the seventies : Do they fit out of sample?," Journal of International Economics, Elsevier, vol. 14(1-2), pages 3-24, February.
  5. Cheung, Yin-Wong & Chinn, Menzie David & Garcia Pascual, Antonio, 2003. "Empirical Exchange Rate Models of the Nineties: Are Any Fit to Survive?," Santa Cruz Department of Economics, Working Paper Series qt12z9x4c5, Department of Economics, UC Santa Cruz.
  6. Johansen, Soren, 1995. "Likelihood-Based Inference in Cointegrated Vector Autoregressive Models," OUP Catalogue, Oxford University Press, number 9780198774501.
  7. Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1161-76, December.
  8. Mathias Moersch & Dieter Nautz, 2001. "A note on testing the monetary model of the exchange rate," Applied Financial Economics, Taylor & Francis Journals, vol. 11(3), pages 261-268.
  9. Goldfeld, Stephen M & Sichel, Daniel E, 1987. "Money Demand: The Effects of Inflation and Alternative Adjustment Mechanisms," The Review of Economics and Statistics, MIT Press, vol. 69(3), pages 511-15, August.
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Cited by:
  1. Volodymyr Perederiy, 2007. "Kombinierte Liquiditäts- und Solvenzkennzahlen und ein darauf basierendes Insolvenzprognosemodell für deutsche GmbHs," SFB 649 Discussion Papers SFB649DP2007-060, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
  2. Weber, Axel A. & Beck, Günter W., 2005. "Price stability, inflation convergence and diversity in EMU: Does one size fit all?," CFS Working Paper Series 2005/30, Center for Financial Studies (CFS).

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