The Exchange Rate-Investment Nexus and Exchange Rate Instability: Another Reason for 'Fear of Floating'
We show that expansionary monetary policy causes exchange rate overshooting due to the secondary repercussion comes through the reaction of firms to changed asset prices and the firms' decisions to invest in real capital. This overshooting effect adds to any overshooting that occurs through the traditional Dornbusch (1976) channel, since our model with its market clearing in the short run excludes any Dornbusch overshooting. The model sheds further light on the volatility of real and nominal exchange rates. It suggests that changes in corporate sector profitability may affect exchange rates through international portfolio diversification in corporate securities, and it offers an additional reason for 'fear of floating'.
|Date of creation:||Jun 2006|
|Date of revision:||Jan 2009|
|Publication status:||Published in Keio Economic Studies, 2008.|
|Note:||This paper previously circulated under the title "Monetary Policy, Exchange Rate Overshooting, and Endogenous Physical Capital".|
|Contact details of provider:|| Postal: |
Phone: (860) 486-4889
Fax: (860) 486-4463
Web page: http://www.econ.uconn.edu/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Goldberg, Linda S, 1993. "Exchange Rates and Investment in United States Industry," The Review of Economics and Statistics, MIT Press, vol. 75(4), pages 575-88, November.
- Branson, William H. & Henderson, Dale W., 1985.
"The specification and influence of asset markets,"
Handbook of International Economics,
in: R. W. Jones & P. B. Kenen (ed.), Handbook of International Economics, edition 1, volume 2, chapter 15, pages 749-805
- Nucci, Francesco & Pozzolo, Alberto F., 2001. "Investment and the exchange rate: An analysis with firm-level panel data," European Economic Review, Elsevier, vol. 45(2), pages 259-283, February.
- Frenkel, Jacob A & Rodriguez, Carlos Alfredo, 1975. "Portfolio Equilibrium and the Balance of Payments: A Monetary Approach," American Economic Review, American Economic Association, vol. 65(4), pages 674-88, September.
- Serven, Luis, 1994.
"Capital goods imports, the real exchange rate, and the current account,"
Policy Research Working Paper Series
1298, The World Bank.
- Serven, Luis, 1995. "Capital goods imports, the real exchange rate and the current account," Journal of International Economics, Elsevier, vol. 39(1-2), pages 79-101, August.
- Reinhart, Carmen & Calvo, Guillermo, 2002.
"Fear of floating,"
14000, University Library of Munich, Germany.
- Polly Allen & Peter Kenen, 1976. "Portfolio adjustment in open economies: A comparison of alternative specifications," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 112(1), pages 33-72, March.
- Jose Campa & Linda S. Goldberg, 1993.
"Investment in Manufacturing, Exchange-Rates and External Exposure,"
NBER Working Papers
4378, National Bureau of Economic Research, Inc.
- Campa, Jose & Goldberg, Linda S., 1995. "Investment in manufacturing, exchange rates and external exposure," Journal of International Economics, Elsevier, vol. 38(3-4), pages 297-320, May.
- Goldberg, L.S. & Campa, J., 1993. "Investment in Manufacturing, Exchange-Rate and External Exposure," Working Papers 93-18, C.V. Starr Center for Applied Economics, New York University.
- Barry Eichengreen & Ricardo Hausmann, 1999.
"Exchange rates and financial fragility,"
Proceedings - Economic Policy Symposium - Jackson Hole,
Federal Reserve Bank of Kansas City, pages 329-368.
- Ruffin, Roy J, 1979. "Growth and the Long-Run Theory of International Capital Movements," American Economic Review, American Economic Association, vol. 69(5), pages 832-42, December.
- Landon, Stuart & Smith, Constance E., 2006. "Exchange rates and investment good prices: A cross-industry comparison," Journal of International Money and Finance, Elsevier, vol. 25(2), pages 237-256, March.
- Rogoff, Kenneth, 1999. "Monetary Models of Dollar/Yen/Euro Nominal Exchange Rates: Dead or Undead?," Economic Journal, Royal Economic Society, vol. 109(459), pages F655-59, November.
- Frankel, Jeffrey A & Froot, Kenneth A, 1990. "Chartists, Fundamentalists, and Trading in the Foreign Exchange Market," American Economic Review, American Economic Association, vol. 80(2), pages 181-85, May.
- 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.
- Jeffrey D. Sachs, 1981. "The Current Account and macroeconomic Adjustment in the 1970s," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 12(1), pages 201-282.
- Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1161-76, December.
- Krugman, Paul & Taylor, Lance, 1978.
"Contractionary effects of devaluation,"
Journal of International Economics,
Elsevier, vol. 8(3), pages 445-456, August.
- Hans Genberg & Henryk Kierzkowski, 1979. "Impact and long-run effects of economic disturbances in a dynamic model of exchange rate determination," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 115(4), pages 605-628, December.
- MacDonald, Ronald, 1999. "Exchange Rate Behaviour: Are Fundamentals Important?," Economic Journal, Royal Economic Society, vol. 109(459), pages F673-91, November.
- Frankel, Jeffrey A. & Rose, Andrew K., 1995. "Empirical research on nominal exchange rates," Handbook of International Economics, in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 33, pages 1689-1729 Elsevier.
- Dornbusch, Rudiger & Fischer, Stanley, 1980. "Exchange Rates and the Current Account," American Economic Review, American Economic Association, vol. 70(5), pages 960-71, December.
- 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.
- Frankel, Jeffrey, 2005.
"Contractionary Currency Crashes In Developing Countries,"
Working Paper Series
rwp05-017, Harvard University, John F. Kennedy School of Government.
- Jeffrey A. Frankel, 2005. "Contractionary Currency Crashes in Developing Countries," NBER Working Papers 11508, National Bureau of Economic Research, Inc.
- Pentti J.K. Kouri, 1978. "Balance of Payments and the Foreign Exchange Market: A Dynamic Partial Equilibrium Model," Cowles Foundation Discussion Papers 510, Cowles Foundation for Research in Economics, Yale University.
- Paul Hallwood & Ronald MacDonald, 2008. "International Money and Finance," Working papers 2008-02, University of Connecticut, Department of Economics.
- Rodriguez, Carlos Alfredo, 1980. "The Role of Trade Flows in Exchange Rate Determination: A Rational Expectations Approach," Journal of Political Economy, University of Chicago Press, vol. 88(6), pages 1148-58, December.
- Jeffrey A. Frankel., 1987. "Monetary and Portfolio Balance Models of Exchange Rate Determination," Economics Working Papers 8752, University of California at Berkeley.
- Dooley, Michael & Isard, Peter, 1982. "A portfolio-balance rational-expectations model of the dollar-mark exchange rate," Journal of International Economics, Elsevier, vol. 12(3-4), pages 257-276, May.
- 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.
- VJeffrey A. Frankel, 2005. "Mundell-Fleming Lecture: Contractionary Currency Crashes in Developing Countries," IMF Staff Papers, Palgrave Macmillan, vol. 52(2), pages 149-192, September.
When requesting a correction, please mention this item's handle: RePEc:uct:uconnp:2006-15. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Mark McConnel)
If references are entirely missing, you can add them using this form.