This file is part of IDEAS, which uses RePEc data


[ Papers | Articles | Software | Books | Chapters | Authors | Institutions | JEL Classification | NEP reports | Search | New papers by email | Author registration | Rankings | Volunteers | FAQ | Blog | Help! ]

The Exchange Rate-Investment Nexus and Exchange Rate Instability: Another Reason for 'Fear of Floating'

Author info | Abstract | Publisher info | Download info | Related research | Statistics
Author Info
Habib Ahmed (Islamic Development Bank)
C. Paul Hallwood (University of Connecticut)
Stephen M. Miller (University of Connecticut and University of Nevada, Las Vegas)

Additional information is available for the following registered author(s):

Abstract

We show that expansionary monetary policy causes exchange rate overshooting due to the secondary repercussion comes through the reaction of firms to changed asset prices and the firms' decisions to invest in real capital. This overshooting effect adds to any overshooting that occurs through the traditional Dornbusch (1976) channel, since our model with its market clearing in the short run excludes any Dornbusch overshooting. The model sheds further light on the volatility of real and nominal exchange rates. It suggests that changes in corporate sector profitability may affect exchange rates through international portfolio diversification in corporate securities, and it offers an additional reason for 'fear of floating'.

Download Info
To download:

If you experience problems downloading a file, check if you have the proper application to view it first. Information about this may be contained in the File-Format links below. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.econ.uconn.edu/working/2006-15.pdf
File Format: application/pdf
File Function: Full text
Download Restriction: no

Publisher Info
Paper provided by University of Connecticut, Department of Economics in its series Working papers with number 2006-15.

Download reference. The following formats are available: HTML (with abstract), plain text (with abstract), BibTeX, RIS (EndNote, RefMan, ProCite), ReDIF
Length:
Date of creation: Jun 2006
Date of revision: Jan 2009
Publication status: Forthcoming in Keio Economic Studies
Handle: RePEc:uct:uconnp:2006-15

Note: This paper previously circulated under the title "Monetary Policy, Exchange Rate Overshooting, and Endogenous Physical Capital".
Contact details of provider:
Postal: University of Connecticut 341 Mansfield Road, Unit 1063 Storrs, CT 06269-1063
Phone: (860) 486-4889
Fax: (860) 486-4463
Web page: http://www.econ.uconn.edu/
More information through EDIRC

For technical questions regarding this item, or to correct its listing, contact: (Christian Zimmermann).

Related research
Keywords: exchange rates; open economy macroeconomics; monetary policy; exchange rate overshooting;

Other versions of this item:

Find related papers by JEL classification:
F31 - International Economics - - International Finance - - - Foreign Exchange
F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements

This paper has been announced in the following NEP Reports:

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Polly Allen & Peter Kenen, 1976. "Portfolio adjustment in open economies: A comparison of alternative specifications," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 112(1), pages 33-72, March. [Downloadable!] (restricted)
  2. 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. [Downloadable!] (restricted)
  3. Frenkel, Jacob A & Rodriguez, Carlos Alfredo, 1975. "Portfolio Equilibrium and the Balance of Payments: A Monetary Approach," American Economic Review, American Economic Association, vol. 65(4), pages 674-88, September. [Downloadable!] (restricted)
  4. Kouri, Pentti J K, 1976. " The Exchange Rate and the Balance of Payments in the Short Run and in the Long Run: A Monetary Approach," Scandinavian Journal of Economics, Blackwell Publishing, vol. 78(2), pages 280-304.
  5. Pentti J.K. Kouri, 1978. "Balance of Payments and the Foreign Exchange Market: A Dynamic Partial Equilibrium Model," Cowles Foundation Discussion Papers 510, Cowles Foundation, Yale University. [Downloadable!]
  6. Rogoff, Kenneth, 1999. "Monetary Models of Dollar/Yen/Euro Nominal Exchange Rates: Dead or Undead?," Economic Journal, Royal Economic Society, vol. 109(459), pages F655-59, November. [Downloadable!] (restricted)
  7. Frankel, Jeffrey A. & Rose, Andrew K., 1995. "Empirical research on nominal exchange rates," Handbook of International Economics, in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 33, pages 1689-1729 Elsevier. [Downloadable!] (restricted)
  8. Branson, William H. & Henderson, Dale W., 1985. "The specification and influence of asset markets," Handbook of International Economics, in: R. W. Jones & P. B. Kenen (ed.), Handbook of International Economics, edition 1, volume 2, chapter 15, pages 749-805 Elsevier. [Downloadable!] (restricted)
  9. Ruffin, Roy J, 1979. "Growth and the Long-Run Theory of International Capital Movements," American Economic Review, American Economic Association, vol. 69(5), pages 832-42, December. [Downloadable!] (restricted)
  10. Dornbusch, Rudiger & Fischer, Stanley, 1980. "Exchange Rates and the Current Account," American Economic Review, American Economic Association, vol. 70(5), pages 960-71, December. [Downloadable!] (restricted)
  11. Rodriguez, Carlos Alfredo, 1980. "The Role of Trade Flows in Exchange Rate Determination: A Rational Expectations Approach," Journal of Political Economy, University of Chicago Press, vol. 88(6), pages 1148-58, December. [Downloadable!] (restricted)
  12. Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1161-76, December. [Downloadable!] (restricted)
  13. Goldberg, Linda S, 1993. "Exchange Rates and Investment in United States Industry," The Review of Economics and Statistics, MIT Press, vol. 75(4), pages 575-88, November. [Downloadable!] (restricted)
  14. 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. [Downloadable!] (restricted)
  15. Serven, Luis, 1995. "Capital goods imports, the real exchange rate and the current account," Journal of International Economics, Elsevier, vol. 39(1-2), pages 79-101, August. [Downloadable!] (restricted)
    Other versions:
  16. Frankel, Jeffrey A & Froot, Kenneth A, 1990. "Chartists, Fundamentalists, and Trading in the Foreign Exchange Market," American Economic Review, American Economic Association, vol. 80(2), pages 181-85, May. [Downloadable!] (restricted)
  17. Dooley, Michael & Isard, Peter, 1982. "A portfolio-balance rational-expectations model of the dollar-mark exchange rate," Journal of International Economics, Elsevier, vol. 12(3-4), pages 257-276, May. [Downloadable!] (restricted)
  18. Nucci, Francesco & Pozzolo, Alberto F., 2001. "Investment and the exchange rate: An analysis with firm-level panel data," European Economic Review, Elsevier, vol. 45(2), pages 259-283, February. [Downloadable!] (restricted)
  19. Hans Genberg & Henryk Kierzkowski, 1979. "Impact and long-run effects of economic disturbances in a dynamic model of exchange rate determination," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 115(4), pages 605-628, December. [Downloadable!] (restricted)
  20. Barry Eichengreen & Ricardo Hausmann, 1999. "Exchange Rates and Financial Fragility," NBER Working Papers 7418, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  21. MacDonald, Ronald, 1999. "Exchange Rate Behaviour: Are Fundamentals Important?," Economic Journal, Royal Economic Society, vol. 109(459), pages F673-91, November. [Downloadable!] (restricted)
  22. Paul Hallwood & Ronald MacDonald, 2008. "International Money and Finance," Working papers 2008-02, University of Connecticut, Department of Economics. [Downloadable!]
  23. Krugman, Paul & Taylor, Lance, 1978. "Contractionary effects of devaluation," Journal of International Economics, Elsevier, vol. 8(3), pages 445-456, August. [Downloadable!] (restricted)
    Other versions:
  24. Jeffrey D. Sachs, 1981. "The Current Account and macroeconomic Adjustment in the 1970s," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 12(1981-1), pages 201-282. [Downloadable!]
Full references

Statistics
Access and download statistics

Did you know? Want to help out with this project? Look for volunteer opportunities.

This page was last updated on 2009-10-28.

This information is provided to you by IDEAS at the Department of Economics, College of Liberal Arts and Sciences, University of Connecticut using RePEc data on a server sponsored by the Society for Economic Dynamics.