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Propagation of Speculative Cycles: The Exchange Rate Channel

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  • Massimiliano La Marca

Abstract

The nominal and real exchange rates are key relative prices within and between economies. Their volatility and gyrations can have significant cumulative effects on the development pattern of financially integrated economies. The article documents the linkage between global risk aversion and the exchange rate of some developed and developing economy currencies characterised by large short-term interest rate differentials. If capital flows can drive exchange rates and transmit international speculative cycles inside the economic system, a careful design of monetary policy, exchange rate and capital management regimes is a fundamental ingredient of a successful development strategy.

Suggested Citation

  • Massimiliano La Marca, 2012. "Propagation of Speculative Cycles: The Exchange Rate Channel," Journal of Development Studies, Taylor & Francis Journals, vol. 48(6), pages 695-713, June.
    • Handle: RePEc:taf:jdevst:v:48:y:2012:i:6:p:695-713
    DOI: 10.1080/00220388.2011.649262
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    References listed on IDEAS

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    1. Guillermo A. Calvo & Leonardo Leiderman & Carmen M. Reinhart, 1993. "Capital Inflows and Real Exchange Rate Appreciation in Latin America: The Role of External Factors," IMF Staff Papers, Palgrave Macmillan, vol. 40(1), pages 108-151, March.
    2. Hausmann, Ricardo & Panizza, Ugo & Rigobon, Roberto, 2006. "The long-run volatility puzzle of the real exchange rate," Journal of International Money and Finance, Elsevier, vol. 25(1), pages 93-124, February.
    3. Mussa, Michael, 1986. "Nominal exchange rate regimes and the behavior of real exchange rates: Evidence and implications," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 25(1), pages 117-214, January.
    4. Guillermo A. Calvo & Leonardo Leiderman & Carmen M. Reinhart, 1993. "Capital Inflows and Real Exchange Rate Appreciation in Latin America: The Role of External Factors," IMF Staff Papers, Palgrave Macmillan, vol. 40(1), pages 108-151, March.
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    Cited by:

    1. Philippe Burger, 2014. "Inflation and Market Uncertainty in South Africa," South African Journal of Economics, Economic Society of South Africa, vol. 82(4), pages 583-602, December.

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