Exchange Rate Economics
AbstractThe paper summarizes the current theory of how a floating exchange rate is determined, dividing the subject into what determines the steady state and what determines the transition to steady state. The inadequacies of this model are examined, and an alternative “behavioral” model, which recognizes that the foreign exchange market is populated by both fundamentalists and chartists is presented. It is argued that the main importance of understanding the foreign exchange market for development strategy is to permit a correct appraisal of the dangers of Dutch disease. Empirically it seems that from the standpoint of promoting development it is preferable to have a mildly undervalued rate. The paper concludes by examining implications for exchange rate regimes.
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Bibliographic InfoPaper provided by Peterson Institute for International Economics in its series Working Paper Series with number WP08-3.
Date of creation: Feb 2008
Date of revision:
Exchange rates; behavioral model; Dutch disease;
Other versions of this item:
- F31 - International Economics - - International Finance - - - Foreign Exchange
- F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
- O24 - Economic Development, Technological Change, and Growth - - Development Planning and Policy - - - Trade Policy; Factor Movement; Foreign Exchange Policy
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-02-16 (All new papers)
- NEP-CBA-2008-02-16 (Central Banking)
- NEP-IFN-2008-02-16 (International Finance)
- NEP-OPM-2008-02-16 (Open Economy Macroeconomic)
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