This paper suggests a structural connection between rational speculative activity and exchange rate volatility. We note that, when Friedman originally claimed that rational speculators must smooth exchange rate, he excluded interest rate differentials form his interpretation of speculator behavior. If interest rates matter, rational speculators could sometimes violate Friedman's description, and buy a currency whose value is relatively high or sell a currency whose value is low.
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Paper provided by Purdue University, Krannert School of Management - Center for International Business Education and Research (CIBER) in its series Papers with number
97-005.
Length: 30 pages Date of creation: 1997 Date of revision: Handle: RePEc:fth:purkib:97-005
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Find related papers by JEL classification: F31 - International Economics - - International Finance - - - Foreign Exchange G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
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