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Exchange Rate Misalignments and Crises

Listed author(s):
  • Jerome L. Stein
  • Giovanna Paladino

The problem is to evaluate the likelihood that a country will face a currency or balance of payments crisis over a given horizon. When is it rational for market participants to expect a depreciation of the currency? On the basis of considerable empirical studies we know that in both banking and currency crises, there is a multitude of weak and deteriorating economic fundamentals. Our theme is that there is an economic logic to medium and longer-term m ovements in exchange rates, within the context of a consistent dynamic stock-flow model. The equilibrium real exchange rate is a trajectory, not a point. We provide objective measures of the real fundamentals that determine the moving equilibrium real ex c hange rate, and explain the dynamic economic mechanism whereby the actual exchange rate converges to this moving equilibrium exchange rate, called the NATREX. The fundamentals are primarily social consumption/GDP, which is generally driven by fiscal polic y, and the productivity of the economy. Trends in social consumption/GDP, and in fiscal policy, reflected political regime changes in France, Germany and Italy.

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File URL: http://www.cesifo-group.de/DocDL/cesifo_wp205.pdf
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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 205.

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Date of creation: 1999
Handle: RePEc:ces:ceswps:_205
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  1. Charles R. Bean, 1992. "Economic and Monetary Union in Europe," Journal of Economic Perspectives, American Economic Association, vol. 6(4), pages 31-52, Fall.
  2. Graciela Kaminsky & Saul Lizondo & Carmen M. Reinhart, 1998. "Leading Indicators of Currency Crises," IMF Staff Papers, Palgrave Macmillan, vol. 45(1), pages 1-48, March.
  3. Carmen M. Reinhart & Graciela L. Kaminsky, 1999. "The Twin Crises: The Causes of Banking and Balance-of-Payments Problems," American Economic Review, American Economic Association, vol. 89(3), pages 473-500, June.
  4. Ettore F. Infante & Jerome L. Stein, 1973. "Optimal Growth with Robust Feedback Control," Review of Economic Studies, Oxford University Press, vol. 40(1), pages 47-60.
  5. Jerome L. Stein, 1995. "The Fundamental Determinants of the real Exchange Rate of the US Dollar Relative to the G7," Working Papers 95-8, Brown University, Department of Economics.
  6. Stein, Jerome L. & Paladino, Giovanna, 1997. "Recent developments in international finance: A guide to research," Journal of Banking & Finance, Elsevier, vol. 21(11-12), pages 1685-1720, December.
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