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What Determines the Nominal Exchange Rate? Some Cross Sectional Evidence

  • Philip R. Lane

In this paper, the determination of long-run movements in nominal exchange rates across countries are examined. The author models the long-run movement in the nominal exchange rate as depending on (1) the long-run inflation differential and (2) the long-run change in the real exchange rate. He argues that the former depends on country characteristics such as openness, country size, the level of outstanding government debt, and central bank independence, and the latter on the rate of economic growth and the terms of trade. Empirical support for both channels is provided, suggesting the fruitfulness, for the analysis of exchange rates, of studying cross-sectional cross-country data.

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Article provided by Canadian Economics Association in its journal Canadian Journal of Economics.

Volume (Year): 32 (1999)
Issue (Month): 1 (February)
Pages: 118-138

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Handle: RePEc:cje:issued:v:32:y:1999:i:1:p:118-138
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  1. Thomas J. Sargent & Neil Wallace, 1981. "Some unpleasant monetarist arithmetic," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall.
  2. Charles Engel, 1996. "Long-Run PPP May Not Hold After All," NBER Working Papers 5646, National Bureau of Economic Research, Inc.
  3. Tornell, Aaron & Velasco, Andres, 1995. "Fixed Versus Flexible Exchange Rates: Which Provides More Fiscal Discipline," Working Papers 95-06, C.V. Starr Center for Applied Economics, New York University.
  4. Bruno, Michael & Easterly, William, 1998. "Inflation crises and long-run growth," Journal of Monetary Economics, Elsevier, vol. 41(1), pages 3-26, February.
  5. Barro, Robert J & Gordon, David B, 1983. "A Positive Theory of Monetary Policy in a Natural Rate Model," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 589-610, August.
  6. Kenneth A. Froot & Kenneth Rogoff, 1994. "Perspectives on PPP and Long-Run Real Exchange Rates," NBER Working Papers 4952, National Bureau of Economic Research, Inc.
  7. Matthew B. Canzoneri & Robert E. Cumby & Behzad Diba, 1996. "Relative Labor Productivity and the Real Exchange Rate in the Long Run: Evidence for a Panel of OECD Countries," NBER Working Papers 5676, National Bureau of Economic Research, Inc.
  8. Robert J. Barro, 2013. "Inflation and Economic Growth," Annals of Economics and Finance, Society for AEF, vol. 14(1), pages 121-144, May.
  9. Bhagwati, Jagdish N, 1984. "Why Are Services Cheaper in the Poor Countries?," Economic Journal, Royal Economic Society, vol. 94(374), pages 279-86, June.
  10. 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.
  11. Mariano Tommasi, 1993. "The Consequences of Price Instability on Search Markets," UCLA Economics Working Papers 700, UCLA Department of Economics.
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