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Exchange Rate Volatility and Misalignment: Evaluating Some Proposals for Reform

  • Jacob A. Frenkel
  • Morris Goldstein

In this paper, we analyze several proposals for reducing the volatility and/or misalignment of key-currency exchange rates. The proposals examined are a system of target zones, the imposition of controls or taxes on international capital flows, and a strengthening of international coordination over economic policies. We also review key characteristics of the behavior of major-currency exchange rates over the period of floating rates and examine the various criteria or standards for drawing inferences about excess volatility and misalignment. In evaluating exchange rate volatility, attention is directed toward the influence of the exchange rate regime, to the behavior of fundamentals, to the volatility of both goods prices and other asset prices, to the costs of exchange rate volatility, and to the nature of shocks facing the economy. Turning to misalignment, we examine the strengths and weaknesses of the purchasing-power-parity approach, of the underlying balance approach, and of the sustainability approach. We argue that inferences about excess exchange rate volatility and misalignment are subject to wide margins of error and that the exchange rate experience of the past 15 years is subject to multiple interpretations.

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File URL: http://www.nber.org/papers/w2894.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2894.

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Date of creation: Mar 1989
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Publication status: published as From Financial Market Volatility, (A Symposium Sponsored By The Federal Reserve Bank of Kansas City), pp. 185-220. Kansas City, MO: The Federal Reserve Bank of Kansas City, 1988.
Handle: RePEc:nbr:nberwo:2894
Note: EFG ITI IFM
Contact details of provider: Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
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  1. Dornbusch, Rudiger & Frankel, Jeffrey, 1988. "The Flexible Exchange Rate System: Experience and Alternatives," Department of Economics, Working Paper Series qt5ct1w459, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  2. Peter Hooper & Catherine L. Mann, 1987. "The U.S. external deficit: its causes and persistence," International Finance Discussion Papers 316, Board of Governors of the Federal Reserve System (U.S.).
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  4. Jacob A. Frenkel & Joshua Aizenman, 1981. "Aspects of the Optimal Management of Exchange Rates," NBER Working Papers 0748, National Bureau of Economic Research, Inc.
  5. Feldstein, Martin S, 1988. "Distinguished Lecture on Economics in Government: Thinking about International Economic Coordination," Journal of Economic Perspectives, American Economic Association, vol. 2(2), pages 3-13, Spring.
  6. Peter Isard, 1987. "Lessons from Empirical Models of Exchange Rates (Enseignements tirés des modèles empiriques de comportement des taux de change) (Enseñanzas que nos brindan los modelos empíricos de tipos de cambio," IMF Staff Papers, Palgrave Macmillan, vol. 34(1), pages 1-28, March.
  7. Blanchard, Olivier Jean, 1979. "Speculative bubbles, crashes and rational expectations," Economics Letters, Elsevier, vol. 3(4), pages 387-389.
  8. Paul R. Krugman & Richard E. Baldwin, 1987. "The Persistence of the U.S. Trade Deficit," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 18(1), pages 1-56.
  9. Jacob A. Frenkel & Morris Goldstein & Paul R. Masson, 1988. "International Coordination of Economic Policies: Scope, Methods, and Effects," NBER Working Papers 2670, National Bureau of Economic Research, Inc.
  10. Meese, Richard A. & Rogoff, Kenneth, 1983. "Empirical exchange rate models of the seventies : Do they fit out of sample?," Journal of International Economics, Elsevier, vol. 14(1-2), pages 3-24, February.
  11. James Tobin, 1978. "A Proposal for International Monetary Reform," Eastern Economic Journal, Eastern Economic Association, vol. 4(3-4), pages 153-159, Jul/Oct.
  12. Frenkel, Jacob A, 1976. " A Monetary Approach to the Exchange Rate: Doctrinal Aspects and Empirical Evidence," Scandinavian Journal of Economics, Wiley Blackwell, vol. 78(2), pages 200-224.
  13. Gilles Oudiz & Jeffrey Sachs, 1984. "Macroeconomic Policy Coordination among the Industrial Economies," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 15(1), pages 1-76.
  14. West, Kenneth D., 1987. "A standard monetary model and the variability of the deutschemark-dollar exchange rate," Journal of International Economics, Elsevier, vol. 23(1-2), pages 57-76, August.
  15. Matthew B. Canzoneri, 1983. "Monetary policy games and the role of private information," International Finance Discussion Papers 249, Board of Governors of the Federal Reserve System (U.S.).
  16. Atish R. Ghosh & Paul R. Masson, 1988. "International Policy Coordination in a World with Model Uncertainty," IMF Staff Papers, Palgrave Macmillan, vol. 35(2), pages 230-258, June.
  17. Hansen, Lars Peter & Hodrick, Robert J, 1980. "Forward Exchange Rates as Optimal Predictors of Future Spot Rates: An Econometric Analysis," Journal of Political Economy, University of Chicago Press, vol. 88(5), pages 829-53, October.
  18. Paul De Grauwe, 1988. "Exchange Rate Variability and the Slowdown in Growth of International Trade," IMF Staff Papers, Palgrave Macmillan, vol. 35(1), pages 63-84, March.
  19. Richard C. Marston, 1986. "Real Exchange Rates and Productivity Growth in the United States and Japan," NBER Working Papers 1922, National Bureau of Economic Research, Inc.
  20. Michael P. Dooley & Jeffrey R. Shafer, 1976. "Analysis of short-run exchange behavior: March, 1993 to September, 1975," International Finance Discussion Papers 76, Board of Governors of the Federal Reserve System (U.S.).
  21. Ralph Tryon, 1979. "Testing for rational expectations in foreign exchange markets," International Finance Discussion Papers 139, Board of Governors of the Federal Reserve System (U.S.).
  22. Rogoff, Kenneth, 1985. "Can international monetary policy cooperation be counterproductive?," Journal of International Economics, Elsevier, vol. 18(3-4), pages 199-217, May.
  23. Frankel, Jeffrey A & Froot, Kenneth A, 1987. "Using Survey Data to Test Standard Propositions Regarding Exchange Rate Expectations," American Economic Review, American Economic Association, vol. 77(1), pages 133-53, March.
  24. Frenkel, Jacob A, 1987. "The International Monetary System: Should It Be Reformed?," American Economic Review, American Economic Association, vol. 77(2), pages 205-10, May.
  25. Edison, Hali J, 1987. "Purchasing Power Parity in the Long Run: A Test of the Dollar/Pound Exchange Rate (1890-1978)," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 19(3), pages 376-87, August.
  26. Bela Balassa, 1964. "The Purchasing-Power Parity Doctrine: A Reappraisal," Journal of Political Economy, University of Chicago Press, vol. 72, pages 584.
  27. Jeffrey A. Frankel & Kenneth A. Froot, 1985. "Using Survey Data to Test Some Standard Propositions Regarding Exchange Rate Expectations," NBER Working Papers 1672, National Bureau of Economic Research, Inc.
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