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What Determines the Nominal Exchange Rate? Some Cross Sectional Evidence

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  • Philip R. Lane

Abstract

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.

Suggested Citation

  • Philip R. Lane, 1999. "What Determines the Nominal Exchange Rate? Some Cross Sectional Evidence," Canadian Journal of Economics, Canadian Economics Association, vol. 32(1), pages 118-138, February.
  • Handle: RePEc:cje:issued:v:32:y:1999:i:1:p:118-138
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    1. Kenneth Rogoff, 1985. "The Optimal Degree of Commitment to an Intermediate Monetary Target," The Quarterly Journal of Economics, Oxford University Press, vol. 100(4), pages 1169-1189.
    2. Tornell, Aaron & Velasco, Andres, 2000. "Fixed versus flexible exchange rates: Which provides more fiscal discipline?," Journal of Monetary Economics, Elsevier, vol. 45(2), pages 399-436, April.
    3. Robert J. Barro, 2013. "Inflation and Economic Growth," Annals of Economics and Finance, Society for AEF, vol. 14(1), pages 121-144, May.
    4. Engel, Charles, 2000. "Long-run PPP may not hold after all," Journal of International Economics, Elsevier, vol. 51(2), pages 243-273, August.
    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. 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.
    7. Bruno, Michael & Easterly, William, 1998. "Inflation crises and long-run growth," Journal of Monetary Economics, Elsevier, vol. 41(1), pages 3-26, February.
    8. Thomas J. Sargent & Neil Wallace, 1981. "Some unpleasant monetarist arithmetic," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall.
    9. Canzoneri, Matthew B. & Cumby, Robert E. & Diba, Behzad, 1999. "Relative labor productivity and the real exchange rate in the long run: evidence for a panel of OECD countries," Journal of International Economics, Elsevier, vol. 47(2), pages 245-266, April.
    10. Froot, Kenneth A. & Rogoff, Kenneth, 1995. "Perspectives on PPP and long-run real exchange rates," Handbook of International Economics,in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 32, pages 1647-1688 Elsevier.
    11. Mariano Tommasi, 1993. "The Consequences of Price Instability on Search Markets," UCLA Economics Working Papers 700, UCLA Department of Economics.
    12. Bhagwati, Jagdish N, 1984. "Why Are Services Cheaper in the Poor Countries?," Economic Journal, Royal Economic Society, vol. 94(374), pages 279-286, June.
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    Cited by:

    1. Lane, Philip R., 2001. "The new open economy macroeconomics: a survey," Journal of International Economics, Elsevier, vol. 54(2), pages 235-266, August.
    2. Honohan, Patrick & Lane, Philip R, 1999. "Pegging to the Dollar and the Euro," International Finance, Wiley Blackwell, vol. 2(3), pages 379-410, November.
    3. repec:kap:atlecj:v:45:y:2017:i:4:d:10.1007_s11293-017-9549-3 is not listed on IDEAS
    4. Zhang, Fan & Pan, Zuohong, 2004. "Determination of China's long-run nominal exchange rate and official intervention," China Economic Review, Elsevier, vol. 15(3), pages 360-365.

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    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange

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