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A Model of Foreign Exchange Rate Indetermination

  • Engel, C.

Economic agents undertake actions to protect themselves from sort-run impact of foreign exchange rate fluctuations: Nominal goods prices are set in consumer' currencies and firms hedge foreign exchange risk. A model is presented here which shows that these features of the economy can lead to inderminacy in the nominal exchange rate in the short run.

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Paper provided by University of Washington, Department of Economics in its series Working Papers with number 96-13.

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Length: 20 pages
Date of creation: 1996
Date of revision:
Handle: RePEc:udb:wpaper:96-13
Contact details of provider: Postal: Box 353330, Seattle, WA 98193-3330
Web page: http://www.econ.washington.edu/
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  1. Charles Engel & John H. Rogers, 1995. "How wide is the border?," International Finance Discussion Papers 498, Board of Governors of the Federal Reserve System (U.S.).
  2. Sven W. Arndt & J. David Richardson, 1987. "Real-Financial Linkages Among Open Economies," NBER Working Papers 2230, National Bureau of Economic Research, Inc.
  3. Charles Engel, 1992. "Real Exchange Rates and Relative Prices: An Empirical Investigation," NBER Working Papers 4231, National Bureau of Economic Research, Inc.
  4. Engel, Charles, 1992. "On the foreign exchange risk premium in a general equilibrium model," Journal of International Economics, Elsevier, vol. 32(3-4), pages 305-319, May.
  5. Flood, Robert P. & Rose, Andrew K., 1995. "Fixing exchange rates A virtual quest for fundamentals," Journal of Monetary Economics, Elsevier, vol. 36(1), pages 3-37, August.
  6. Frankel, Jeffrey A. & Meese, Richard, 1987. "Are Exchange Rates Excessively Variable?," Department of Economics, Working Paper Series qt18n4c5f6, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  7. Betts, Caroline & Devereux, Michael B., 2000. "Exchange rate dynamics in a model of pricing-to-market," Journal of International Economics, Elsevier, vol. 50(1), pages 215-244, February.
  8. Mark, Nelson C, 1995. "Exchange Rates and Fundamentals: Evidence on Long-Horizon Predictability," American Economic Review, American Economic Association, vol. 85(1), pages 201-18, March.
  9. Richard Meese & Kenneth Rogoff & Jacob Frenkel, . "The Out-of-Sample Failure of Empirical Exchange Rate Models: Sampling Error or Misspecification?," Working Paper 32044, Harvard University OpenScholar.
  10. Meese, Richard A, 1986. "Testing for Bubbles in Exchange Markets: A Case of Sparkling Rates?," Journal of Political Economy, University of Chicago Press, vol. 94(2), pages 345-73, April.
  11. 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.
  12. Mark, Nelson C., 1985. "On time varying risk premia in the foreign exchange market: An econometric analysis," Journal of Monetary Economics, Elsevier, vol. 16(1), pages 3-18, July.
  13. Jeffrey A. Frankel, 1993. "On Exchange Rates," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061546, June.
  14. Dornbusch, Rudiger, 1987. "Exchange Rates and Prices," American Economic Review, American Economic Association, vol. 77(1), pages 93-106, March.
  15. Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1161-76, December.
  16. Kroner, Kenneth F. & Lastrapes, William D., 1993. "The impact of exchange rate volatility on international trade: Reduced form estimates using the GARCH-in-mean model," Journal of International Money and Finance, Elsevier, vol. 12(3), pages 298-318, June.
  17. Engel, Charles, 1996. "The forward discount anomaly and the risk premium: A survey of recent evidence," Journal of Empirical Finance, Elsevier, vol. 3(2), pages 123-192, June.
  18. MacDonald, Ronald & Taylor, Mark P., 1994. "The monetary model of the exchange rate: long-run relationships, short-run dynamics and how to beat a random walk," Journal of International Money and Finance, Elsevier, vol. 13(3), pages 276-290, June.
  19. Grilli, Vittorio & Roubini, Nouriel, 1992. "Liquidity and exchange rates," Journal of International Economics, Elsevier, vol. 32(3-4), pages 339-352, May.
  20. Huang, Roger D, 1981. "The Monetary Approach to Exchange Rate in an Efficient Foreign Exchange Market: Tests Based on Volatility," Journal of Finance, American Finance Association, vol. 36(1), pages 31-41, March.
  21. Paul Krugman, 1986. "Pricing to Market when the Exchange Rate Changes," NBER Working Papers 1926, National Bureau of Economic Research, Inc.
  22. King, Robert G. & Wallace, Neil & Weber, Warren E., 1992. "Nonfundamental uncertainty and exchange rates," Journal of International Economics, Elsevier, vol. 32(1-2), pages 83-108, February.
  23. Marston, Richard C., 1990. "Pricing to market in Japanese manufacturing," Journal of International Economics, Elsevier, vol. 29(3-4), pages 217-236, November.
  24. Mankiw, N Gregory, 1985. "Small Menu Costs and Large Business Cycles: A Macroeconomic Model," The Quarterly Journal of Economics, MIT Press, vol. 100(2), pages 529-38, May.
  25. Subramanian Rangan & Robert Z. Lawrence, 1993. "The Responses of U.S. Firms to Exchange Rate Fluctuations: Piercing the Corporate Veil," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 24(2), pages 341-379.
  26. Manuelli, Rodolfo E & Peck, James, 1990. "Exchange Rate Volatility in an Equilibrium Asset Pricing Model," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 31(3), pages 559-74, August.
  27. Chinn, Menzie D. & Meese, Richard A., 1995. "Banking on currency forecasts: How predictable is change in money?," Journal of International Economics, Elsevier, vol. 38(1-2), pages 161-178, February.
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