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Equilibrium and Disequilibrium Exchange Rates

The paper reviews theoretical developments in the field of exchange rate theory and assesses the empirical evidence. Since the empirical evidence does not lend support to the models that have been formulated, a number of reasons for that failure are suggested. These include the argument that the current account has been overrated as an exchange rate determinant and that the role of "news" as yet remains to be tested in an extensive way. Four exchange rate problems are identified as possibly giving justification to exchange market intervention or other policies. They are the possibility of speculative bubbles, the peso problem, the use of irrelevant information and the problem of real appreciation in the case of monetarist stabilization. In each case the exchange rate can deviate from fundamentals, following the asset market rather than the goods market and thus disturbing macroeconomic equilibrium.

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Paper provided by Massachusetts Institute of Technology (MIT), Department of Economics in its series Working papers with number 309.

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Date of creation: Sep 1982
Date of revision:
Handle: RePEc:mit:worpap:309
Contact details of provider: Postal: MASSACHUSETTS INSTITUTE OF TECHNOLOGY (MIT), DEPARTMENT OF ECONOMICS, 50 MEMORIAL DRIVE CAMBRIDGE MASSACHUSETTS 02142 USA
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Web page: http://econ-www.mit.edu/

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  1. Mussa, Michael, 1979. "Empirical regularities in the behavior of exchange rates and theories of the foreign exchange market," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 11(1), pages 9-57, January.
  2. Stephen W. Salant & Dale W. Henderson, 1976. "Market anticipations, government policy, and the price of gold," International Finance Discussion Papers 81, Board of Governors of the Federal Reserve System (U.S.).
  3. Shiller, Robert J, 1981. "The Use of Volatility Measures in Assessing Market Efficiency," Journal of Finance, American Finance Association, vol. 36(2), pages 291-304, May.
  4. S. Grossman & R. Shiller, . "The Determinants of the Variability of Stock Market Price," Rodney L. White Center for Financial Research Working Papers 18-80, Wharton School Rodney L. White Center for Financial Research.
  5. Paul R. Krugman, 1981. "Consumption Preferences, Asset Demands, and Distribution Effects in International Financial Markets," NBER Working Papers 0651, National Bureau of Economic Research, Inc.
  6. James Tobin, 1978. "A Proposal for International Monetary Reform," Eastern Economic Journal, Eastern Economic Association, vol. 4(3-4), pages 153-159, Jul/Oct.
  7. Frederic S. Mishkin, 1980. "Does Anticipated Monetary Policy Matter? An Econometric Investigation," NBER Working Papers 0506, National Bureau of Economic Research, Inc.
  8. Richard Meese & Kenneth Rogoff, 1981. "Empirical exchange rate models of the seventies: are any fit to survive?," International Finance Discussion Papers 184, Board of Governors of the Federal Reserve System (U.S.).
  9. Henry C. Wallich & Jo Anna Gray, 1979. "Stabilization policy and vicious and virtuous circles," International Finance Discussion Papers 152, Board of Governors of the Federal Reserve System (U.S.).
  10. Tirole, Jean, 1982. "On the Possibility of Speculation under Rational Expectations," Econometrica, Econometric Society, vol. 50(5), pages 1163-81, September.
  11. Buiter, Willem H & Miller, Marcus, 1981. "Monetary Policy and International Competitiveness: The Problems of Adjustment," Oxford Economic Papers, Oxford University Press, vol. 33(0), pages 143-75, Supplemen.
  12. Engel, Charles & Frankel, Jeffrey, 1982. "Why money announcements move interest rates: an answer from the foreign exchange market," Proceedings, Federal Reserve Bank of San Francisco, issue 6, pages 1-36.
  13. Salant, Stephen W & Henderson, Dale W, 1978. "Market Anticipations of Government Policies and the Price of Gold," Journal of Political Economy, University of Chicago Press, vol. 86(4), pages 627-48, August.
  14. Frankel, Jeffrey A, 1979. "On the Mark: A Theory of Floating Exchange Rates Based on Real Interest Differentials," American Economic Review, American Economic Association, vol. 69(4), pages 610-22, September.
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