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Equilibrium exchange rate theories under flexible exchange rate regimes

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  • Canale, Rosaria Rita

Abstract

Economic theory refers to several notions of the exchange rate equilibrium value in a flexible exchange rate regime. It has been defined as that consistent with : a) the equilibrium of trade balance; b)the equilibrium of current account; c) the overall equilibrium of the balance of payments; d) the absence of speculative attacks on foreign exchange markets; e) the absence of a beggar thy neighbour” dispute at an international level; f) the achievement of price stability; g) the pursuit of a monetary policy rule. Through a literature survey we have seen that different exchange rates have effects on output and employment both in the short and in the long run. However the major conclusion was reached by an extension of recent studies, according to which, even if the central bank strictly controls the inflation rate, the absence of a precise objective in terms of price level makes the exchange rate indeterminate.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 3086.

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Date of creation: 2002
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Handle: RePEc:pra:mprapa:3086

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Keywords: exchange rate; equilibrium; real misalignment;

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  1. Barro, Robert J. & Gordon, David B., 1983. "Rules, discretion and reputation in a model of monetary policy," Journal of Monetary Economics, Elsevier, Elsevier, vol. 12(1), pages 101-121.
  2. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 85(3), pages 473-91, June.
  3. Taylor, Mark P, 1988. "A DYMIMIC Model of Forward Foreign Exchange Risk, with Estimates for Three Major Exchange Rates," The Manchester School of Economic & Social Studies, University of Manchester, University of Manchester, vol. 56(1), pages 55-68, March.
  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, Elsevier, vol. 14(1-2), pages 3-24, February.
  5. Bilson, John F O, 1978. "The Current Experience with Floating Exchange Rates: An Appraisal of the Monetary Approach," American Economic Review, American Economic Association, American Economic Association, vol. 68(2), pages 392-97, May.
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