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Equilibrium and Disequilibrium Exchange Rates

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  • Rudiger Dornbusch

Abstract

The paper reviews theoretical developments in the field of exchange rate theory and assesses the empirical evidence. Since the empirical evidence does not lend support to the models that have been formulated, a number of reasons for that failure are suggested. These include the argument that the current account has been overrated as an exchange rate determinant and that the role of "news" as yet remains to be tested in an extensive way. Four exchange rate problems are identified as possibly giving justification to exchange market intervention or other policies. They are the possibility of speculative bubbles, the peso problem, the use of irrelevant information and the problem of real appreciation in the case of monetarist stabilization. In each case the exchange rate can deviate from fundamentals, following the asset market rather than the goods market and thus disturbing macroeconomic equilibrium.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 0983.

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Date of creation: Sep 1982
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Publication status: published as Dornbusch, Rudiger. "Equilibrium and Disequilibrium Exchange Rates." Zeitschrift fur Wirtschaftsund Sozialwissenschaften, Vol. 102, No. 6, (1982) pp. 573-599.
Handle: RePEc:nbr:nberwo:0983

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  1. James Tobin, 1978. "A Proposal for International Monetary Reform," Cowles Foundation Discussion Papers 506, Cowles Foundation for Research in Economics, Yale University.
  2. Engel, Charles & Frankel, Jeffrey, 1982. "Why money announcements move interest rates: an answer from the foreign exchange market," Proceedings, Federal Reserve Bank of San Francisco, issue 6, pages 1-36.
  3. Grossman, Sanford J & Shiller, Robert J, 1981. "The Determinants of the Variability of Stock Market Prices," American Economic Review, American Economic Association, vol. 71(2), pages 222-27, May.
  4. Tirole, Jean, 1982. "On the Possibility of Speculation under Rational Expectations," Econometrica, Econometric Society, vol. 50(5), pages 1163-81, September.
  5. Robert J. Shiller, 1980. "The Use of Volatility Measures in Assessing Market Efficiency," NBER Working Papers 0565, National Bureau of Economic Research, Inc.
  6. Henry C. Wallich & Jo Anna Gray, 1979. "Stabilization policy and vicious and virtuous circles," International Finance Discussion Papers 152, Board of Governors of the Federal Reserve System (U.S.).
  7. Frederic S. Mishkin, 1980. "Does Anticipated Monetary Policy Matter? An Econometric Investigation," NBER Working Papers 0506, National Bureau of Economic Research, Inc.
  8. Buiter, Willem H & Miller, Marcus, 1981. "Monetary Policy and International Competitiveness: The Problems of Adjustment," Oxford Economic Papers, Oxford University Press, vol. 33(0), pages 143-75, Supplemen.
  9. Paul R. Krugman, 1981. "Consumption Preferences, Asset Demands, and Distribution Effects in International Financial Markets," NBER Working Papers 0651, National Bureau of Economic Research, Inc.
  10. Richard Meese & Kenneth Rogoff, 1981. "Empirical exchange rate models of the seventies: are any fit to survive?," International Finance Discussion Papers 184, Board of Governors of the Federal Reserve System (U.S.).
  11. Salant, Stephen W & Henderson, Dale W, 1978. "Market Anticipations of Government Policies and the Price of Gold," Journal of Political Economy, University of Chicago Press, vol. 86(4), pages 627-48, August.
  12. Mussa, Michael, 1979. "Empirical regularities in the behavior of exchange rates and theories of the foreign exchange market," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 11(1), pages 9-57, January.
  13. Stephen W. Salant & Dale W. Henderson, 1976. "Market anticipations, government policy, and the price of gold," International Finance Discussion Papers 81, Board of Governors of the Federal Reserve System (U.S.).
  14. 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.
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Cited by:
  1. Sebastion Edwards, 1988. "Real and Monetary Determinants of Real Exchange Rate Behavior: Theory and Evidence from Developing Countries," UCLA Economics Working Papers 506, UCLA Department of Economics.
  2. Martin D. D. Evans & Richard K. Lyons, 2002. "Order Flow and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 110(1), pages 170-180, February.
  3. Camelia Minoiu & Patrick A. Imam, 2008. "Mauritius," IMF Working Papers 08/212, International Monetary Fund.
  4. David M. Kemme & Saktinil Roy, 2005. "Real Exchange Rate Misalignment: Prelude to Crisis?," William Davidson Institute Working Papers Series wp797, William Davidson Institute at the University of Michigan.
  5. Jorge Braga de Macedo, 1984. "Trade and Financial Interdependence Under Flexible Exchange Rates: The Pacific Area," NBER Working Papers 1517, National Bureau of Economic Research, Inc.

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