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Equilibrium and Disequilibrium Exchange Rates

  • Rudiger Dornbusch

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 National Bureau of Economic Research, Inc in its series NBER Working Papers with number 0983.

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Date of creation: Sep 1982
Date of revision:
Publication status: published as Dornbusch, Rudiger. "Equilibrium and Disequilibrium Exchange Rates." Zeitschrift fur Wirtschaftsund Sozialwissenschaften, Vol. 102, No. 6, (1982) pp. 573-599.
Handle: RePEc:nbr:nberwo:0983
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  1. 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.
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  8. James Tobin, 1978. "A Proposal for International Monetary Reform," Eastern Economic Journal, Eastern Economic Association, vol. 4(3-4), pages 153-159, Jul/Oct.
  9. 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.
  10. Richard Meese & Kenneth S. 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.).
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  12. Frederic S. Mishkin, 1980. "Does Anticipated Monetary Policy Matter? An Econometric Investigation," NBER Working Papers 0506, National Bureau of Economic Research, Inc.
  13. 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.
  14. 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.
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