IDEAS home Printed from https://ideas.repec.org/p/nbr/nberwo/0290.html

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. 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.
    2. 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.).
    3. 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.
    4. repec:bla:scandj:v:78:y:1976:i:2:p:280-304 is not listed on IDEAS
    5. 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.
    6. 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.
    7. Paul R. Milgrom, 1978. "Rational Expectations," Discussion Papers 406, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    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. 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.
    4. Papazoglou, Christos & Pentecost, Eric J., 2004. "The dynamic adjustment of a transition economy in the early stages of transformation," Journal of Macroeconomics, Elsevier, vol. 26(3), pages 547-561, September.
    5. Fleissig, Adrian & Swofford, James L., 1996. "A dynamic asymptotically ideal model of money demand," Journal of Monetary Economics, Elsevier, vol. 37(2-3), pages 371-380, April.
    6. Anton Kuzmin, 2022. "Mathematical Exchange Rates Modeling: Equilibrium and Nonequilibrium Dynamics," Mathematics, MDPI, vol. 10(24), pages 1-19, December.
    7. Boucekkine, R. & Laksaci, M. & Touati-Tliba, M., 2021. "Long-run stability of money demand and monetary policy: The case of Algeria," The Journal of Economic Asymmetries, Elsevier, vol. 24(C).
    8. Jan Tin, 2010. "Bequest motives and household money demand," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 34(3), pages 269-283, July.
    9. Santiago Mosquera & Federico Sturzenegger, 2021. "Cepo para principantes," Working Papers 151, Universidad de San Andres, Departamento de Economia, revised Apr 2021.
    10. Bhatta, Siddha Raj, 2011. "Stability of demand for money function in Nepal: A cointegration and error correction modeling approach," MPRA Paper 41404, University Library of Munich, Germany.
    11. Nelson, Edward, 2002. "Direct effects of base money on aggregate demand: theory and evidence," Journal of Monetary Economics, Elsevier, vol. 49(4), pages 687-708, May.
    12. Goodhart, Charles, 1989. "The Conduct of Monetary Policy," Economic Journal, Royal Economic Society, vol. 99(396), pages 293-346, June.
    13. Marcus Scheiblecker, 2017. "Modelling Short-run Money Demand for the US," Applied Economics and Finance, Redfame publishing, vol. 4(5), pages 9-20, September.
    14. Rodriguez, Carlos Alfredo, 1991. "The macroeconomics of the public sector deficit : the case of Argentina," Policy Research Working Paper Series 632, The World Bank.
    15. Faruqee, Hamid & Laxton, Douglas & Muir, Dirk & Pesenti, Paolo, 2008. "Would protectionism defuse global imbalances and spur economic activity? A scenario analysis," Journal of Economic Dynamics and Control, Elsevier, vol. 32(8), pages 2651-2689, August.
    16. Meese, Richard & Rogoff, Kenneth, 1986. "Was it real? The exchange rate -- Interest differential relation: 1973-1984," Journal of Economic Dynamics and Control, Elsevier, vol. 10(1-2), pages 297-298, June.
    17. John B. Carlson & Sharon E. Parrott, 1991. "The demand for M2, opportunity cost, and financial change," Economic Review, Federal Reserve Bank of Cleveland, vol. 27(Q II), pages 2-11.
    18. Peggy E. Swanson, 1983. "Compensating Balances And Foreigners' Dollar Deposits In United States Banks," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 6(3), pages 257-263, September.
    19. Kubendran, N., 2020. "Testing the Effectiveness of Johnsonian Approach using India’s Balance of Payments," Romanian Economic Business Review, Romanian-American University, vol. 15(3), pages 61-80, September.
    20. Christopher J. Neely & Lucio Sarno, 2002. "How well do monetary fundamentals forecast exchange rates?," Review, Federal Reserve Bank of St. Louis, vol. 84(Sep), pages 51-74.

    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.