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Dynamics of a Floating Exchange Rate Regime

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  • Helpman, Elhanan
  • Razin, Assaf

Abstract

We study the full equilibrium dynamics of a two-country world economy with a floating exchange rate, traded and nontraded goods, and explicit modeling of the use of money. The resulting exchange rate equation depends on several details of the economic structure, such as the supply structure and propensities to spend on various goods. Although real exchange rate movements have the usual association with the current account, the ordinary exchange rate may appreciate or depreciate when there are deficits on current account even when the quantities of money do not change. Deviations from purchasing-power parity and the Fisher equation are shown to be the rule rather than the exception.

Suggested Citation

  • Helpman, Elhanan & Razin, Assaf, 1982. "Dynamics of a Floating Exchange Rate Regime," Scholarly Articles 3445095, Harvard University Department of Economics.
    • Handle: RePEc:hrv:faseco:3445095
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    References listed on IDEAS

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    1. Stockman, Alan C, 1980. "A Theory of Exchange Rate Determination," Journal of Political Economy, University of Chicago Press, vol. 88(4), pages 673-698, August.
    2. Calvo, Guillermo A & Rodriguez, Carlos Alfredo, 1977. "A Model of Exchange Rate Determination under Currency Substitution and Rational Expectations," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 617-625, June.
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    1. Alan C. Stockman, 1987. "The equilibrium to exchange rates," Economic Review, Federal Reserve Bank of Richmond, vol. 73(Mar), pages 12-30.
    2. John E. Floyd, 1995. "Uncovered Interest Parity: A Further Reconsideration," Working Papers floyd-95-01, University of Toronto, Department of Economics.
    3. Nishimura, Kazuo & Ohyama, Michihiro, 1995. "External debt cycles," Structural Change and Economic Dynamics, Elsevier, vol. 6(2), pages 215-236, June.
    4. Obstfeld, Maurice & Stockman, Alan C., 1985. "Exchange-rate dynamics," Handbook of International Economics, in: R. W. Jones & P. B. Kenen (ed.), Handbook of International Economics, edition 1, volume 2, chapter 18, pages 917-977, Elsevier.
    5. Greenwood, Jeremy & Williamson, Stephen D., 1989. "International financial intermediation and aggregate fluctuations under alternative exchange rate regimes," Journal of Monetary Economics, Elsevier, vol. 23(3), pages 401-431, May.
    6. John E. Floyd, 1998. "Monetary Policy and the Real Exchange Rate: Some Evidence," Working Papers floyd-98-02, University of Toronto, Department of Economics.
    7. Joshua Aizenman, 1986. "On the Complementarity of Commercial Policy, Capital Controls, and Inflation Tax," Canadian Journal of Economics, Canadian Economics Association, vol. 19(1), pages 114-133, February.
    8. Finn, Mary, 1989. "An econometric analysis of the intertemporal general-equilibrium approach to exchange rate and current account determination," Journal of International Money and Finance, Elsevier, vol. 8(4), pages 467-486, December.
    9. Alessandra Casella and Jonathan Feinstein., 1988. "Management of a Common Currency," Economics Working Papers 8891, University of California at Berkeley.
    10. Balvers, Ronald J. & H. Bergstrand, Jeffrey, 1997. "Equilibrium real exchange rates: closed-form theoretical solutions and some empirical evidence," Journal of International Money and Finance, Elsevier, vol. 16(3), pages 345-366, June.
    11. Charles Engel, 1987. "The Real Effects of Foreign Inflation in the Presence of Currency Substitution," NBER Working Papers 2140, National Bureau of Economic Research, Inc.
    12. Richard H. Clarida, 1985. "International Lending and Borrowing in a Stochastic Sequence Equilibrium," Cowles Foundation Discussion Papers 771, Cowles Foundation for Research in Economics, Yale University.
    13. Fernando Alvarez & Andrew Atkeson & Patrick J. Kehoe, 2009. "Time-Varying Risk, Interest Rates, and Exchange Rates in General Equilibrium," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 76(3), pages 851-878.
    14. Frankel, Jacob A. & Razin, Assaf, 1985. "Aspects of Dual Exchange-Rate Regimes," Foerder Institute for Economic Research Working Papers 275395, Tel-Aviv University > Foerder Institute for Economic Research.
    15. Threemonkong, Attapol, 1992. "An intertemporal-optimizing general equilibrium model of exchange rates and external imbalances," ISU General Staff Papers 1992010108000012961, Iowa State University, Department of Economics.
    16. Rotemberg, Julio J., 1985. "Money and the terms of trade," Journal of International Economics, Elsevier, vol. 19(1-2), pages 141-160, August.
    17. Jacob A. Frenkel & Assaf Razin, 1984. "Fiscal Policies, Debt, and International Economic Interdependence," NBER Working Papers 1266, National Bureau of Economic Research, Inc.
    18. Aizenman, Joshua, 1983. "A theory of current account and exchange rate determinations," European Economic Review, Elsevier, vol. 23(3), pages 261-280, September.
    19. Frenkel, Jacob A. & Mussa, Michael L., 1985. "Asset markets, exchange rates and the balance of payments," Handbook of International Economics, in: R. W. Jones & P. B. Kenen (ed.), Handbook of International Economics, edition 1, volume 2, chapter 14, pages 679-747, Elsevier.
    20. Daniel, Betty C., 1997. "Precautionary saving and persistent current account imbalance," Journal of International Economics, Elsevier, vol. 42(1-2), pages 179-193, February.
    21. Masahiro Kawai & Munehisa Kasuya & Naohisa Hirakata, 2003. "Analysis of the Relative Price of Nontradable Goods in the G7 Countries," Bank of Japan Working Paper Series 03-E-5, Bank of Japan.
    22. Finn, Mary G., 1999. "An equilibrium theory of nominal and real exchange rate comovement," Journal of Monetary Economics, Elsevier, vol. 44(3), pages 453-475, December.
    23. Charles Engel & Feng Zhu, 2019. "Exchange rate puzzles: evidence from rigidly fixed nominal exchange rate systems," BIS Working Papers 805, Bank for International Settlements.

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