IDEAS home Printed from https://ideas.repec.org/p/nbr/nberwo/0290.html
   My bibliography  Save this paper

Exchange Rates in The 1920's: A Monetary Approach

Author

Listed:
  • Jacob A. Frenkel
  • Kenneth W. Clements

Abstract

Current views about flexible exchange rate systems are based, to a large extent, on the lessons from the period of the 1920's during which many exchange rates were flexible. This paper re-examines the evidence from the perspective of the recently revived monetary approach (or more generally, asset-market approach) to the exchange rate. The analysis starts by developing a simple monetary model of exchange rate determination. The key characteristic of the model lies in the notion that, being a relative price of two monies, the equilibrium exchange rate is attained when the existing stocks of the two monies are willingly held. The equilibrium exchange rate is shown to depend on both real and monetary factors which operate through their influence on the relative demands and supplies of monies. The analysis then proceeds to examine the relationship between spot and forward rates for the Franc/Pound, Dollar/Pound and Franc/Dollar exchange rates and the results are shown to be consistent with the efficient market hypothesis. The monetary model is then estimated using monthly data and using the forward premium on foreign exchange as a measure of expectations. In addition to the single-equation ordinary-least-squares estimates, the various exchange rates are also estimated as a system using the mixed-estimation procedure which combines the sample information with prior information which derives from the homogeneity postulate and from known properties of the demand for money. The various results are shown to be consistent with the predictions of the monetary model.

Suggested Citation

  • Jacob A. Frenkel & Kenneth W. Clements, 1978. "Exchange Rates in The 1920's: A Monetary Approach," NBER Working Papers 0290, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:0290
    Note: ITI EFG IFM
    as

    Download full text from publisher

    File URL: http://www.nber.org/papers/w0290.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Mussa, Michael, 1974. "A Monetary Approach to Balance-of-Payments Analysis," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 6(3), pages 333-351, August.
    2. Paul R. Milgrom, 1978. "Rational Expectations," Discussion Papers 406, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    3. 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.
    4. Lance Girton & Don E. Roper, 1976. "Theory and implications of currency substitution," International Finance Discussion Papers 86, Board of Governors of the Federal Reserve System (U.S.).
    5. Chau-nan Chen, 1973. "Diversified Currency Holdings and Flexible Exchange Rates," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 87(1), pages 96-111.
    6. Kouri, Pentti J K, 1976. " The Exchange Rate and the Balance of Payments in the Short Run and in the Long Run: A Monetary Approach," Scandinavian Journal of Economics, Wiley Blackwell, vol. 78(2), pages 280-304.
    7. Stephen M. Goldfeld, 1973. "The Demand for Money Revisited," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 4(3), pages 577-646.
    8. Chrystal, K Alec, 1977. "Demand for International Media of Exchange," American Economic Review, American Economic Association, vol. 67(5), pages 840-850, December.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. 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.
    2. Bordo, Michael D & Choudhri, Ehsan U, 1982. "Currency Substitution and the Demand for Money: Some Evidence for Canada," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 14(1), pages 48-57, February.
    3. Djajic, Slobodan, 1980. "Intermediate Inputs and International Trade: An Analysis of the Real and Monetary Aspects of an Oil Price Shock," Queen's Institute for Economic Research Discussion Papers 275164, Queen's University - Department of Economics.
    4. Nyahoho, Emmanuel, 1995. "La concurrence de monnaies dans un marché financier dématérialisé," L'Actualité Economique, Société Canadienne de Science Economique, vol. 71(3), pages 334-364, septembre.
    5. Maggiori, Matteo, 2021. "International Macroeconomics With Imperfect Financial Markets," SocArXiv z8g6r, Center for Open Science.
    6. Miss Nkunde Mwase & Mr. Francis Y Kumah, 2015. "Revisiting the Concept of Dollarization: The Global Financial Crisis and Dollarization in Low-Income Countries," IMF Working Papers 2015/012, International Monetary Fund.
    7. Betty Daniel, 1981. "Real output effects of announced monetary policy in a small open economy," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 117(3), pages 428-442, September.
    8. 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.
    9. Kondo, Koji, 1997. "Statistical analysis of foreign exchange rates: application of cointegration model and regime-switching stochastic volatility model," ISU General Staff Papers 1997010108000012997, Iowa State University, Department of Economics.
    10. Obstfeld, Maurice, 1981. "Macroeconomic Policy, Exchange-Rate Dynamics, and Optimal Asset Accumulation," Journal of Political Economy, University of Chicago Press, vol. 89(6), pages 1142-1161, December.
    11. Clements, Kenneth W. & Frenkel, Jacob A., 1980. "Exchange rates, money, and relative prices: The dollar-pound in the 1920s," Journal of International Economics, Elsevier, vol. 10(2), pages 249-262, May.
    12. Tivig, Thusnelda, 1987. "The asset market view on flexible exchange rates: A critical comment," Discussion Papers, Series II 18, University of Konstanz, Collaborative Research Centre (SFB) 178 "Internationalization of the Economy".
    13. Suman S. Basu & Atish R. Ghosh & Jonathan D. Ostry & Pablo E. Winant, 2018. "Managing Capital Outflows with Limited Reserves," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 66(2), pages 333-374, June.
    14. Sinha, Avik, 2015. "Conceptualizing Service Export Price Optimization," MPRA Paper 102264, University Library of Munich, Germany, revised 2015.
    15. Frenkel, Jacob A. & Rodriguez, Carlos A., 1980. "Exchange Rate Dynamics and Overshooting Hypothesis," Foerder Institute for Economic Research Working Papers 275323, Tel-Aviv University > Foerder Institute for Economic Research.
    16. Oscar Dancourt, 1992. "Desinflación ortodoxa y retraso cambiario en el Perú: un modelo keynesiano," Documentos de Trabajo / Working Papers 1992-102, Departamento de Economía - Pontificia Universidad Católica del Perú.
    17. Peter Isard, 1982. "An accounting framework and some issues for modelling how exchange rates respond to the news," International Finance Discussion Papers 200, Board of Governors of the Federal Reserve System (U.S.).
    18. Dale W. Henderson & Kenneth S. Rogoff, 1981. "New foreign asset positions and stability in a world portfolio balance model," International Finance Discussion Papers 178, Board of Governors of the Federal Reserve System (U.S.).
    19. McKenzie, C. R., 1992. "Money demand in an open economy," Journal of the Japanese and International Economies, Elsevier, vol. 6(2), pages 176-198, June.
    20. Philippe Ithurbide, 1987. "Les restrictions volontaires d'exportations," Revue Économique, Programme National Persée, vol. 38(1), pages 25-54.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:0290. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: the person in charge (email available below). General contact details of provider: https://edirc.repec.org/data/nberrus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.