The paper develops a theory of exchange rate movements under perfect capital mobility, a slow adjustment of goods markets relative to asset markets, and consistent expectations. The perfect foresight path is derived and it is shown that along that path a monetary expansion causes the exchange rate to depreciate. An initial overshooting of exchange rates is shown to derive from the differential adjustment speed of markets. The magnitude and persistence of the overshooting is developed in terms of the structural parameters of the model. To the extent that output responds to a monetary expansion in the short run, this acts as a dampening effect on exchange depreciation and may, in fact, lead to an increase in interest rates.

https://www.jstor.org/stable/pdfplus/1831272.pdf

Expectations and Exchange Rate Dynamics

This paper reviews, appraises, and critiques theoretical and empirical research on the connections between the operation of the financial system and economic growth. While subject to ample qualifications and countervailing views, the preponderance of evidence suggests that both financial intermediaries and markets matter for growth and that reverse causality alone is not driving this relationship. Furthermore, theory and evidence imply that better developed financial systems ease external financing constraints facing firms, which illuminates one mechanism through which financial development influences economic growth. The paper highlights many areas needing additional research.

Chapter 12 Finance and Growth: Theory and Evidence

This paper deals with the determinants of the exchange rate and develops a monetary view (or more generally, an asset view) of exchange rate determination. The first part traces some of the doctrinal origins of approaches to the analysis of equilibrium exchange rates. The second part examines some of the empirical hypotheses of the monetary approach as well as some features of the efficiency of the foreign exchange markets. Special emphasis is given to the role of expectations in exchange rate determination and a direct observable measure of expectations is proposed. The direct measure of expectations builds on the information that is contained in data from the forward market for foreign exchange. The empirical results are shown to be consistent with the hypotheses of the monetary approach.

https://www.jstor.org/stable/pdfplus/3439924.pdf

A Monetary Approach To The Exchange Rate: Doctrinal Aspects And Empirical Evidence

Forward exchange rate unbiasedness is rejected in tests from the current floating exchange rate era. This paper surveys advances in this area since the publication of Hodrick's (1987) survey. It documents that the change in the future exchange rate is generally negatively related to the forward discount. Properties of the expected forward forecast error are reviewed. Issues such as the relation of uncovered interest parity to real interest parity, and the implications of uncovered interest parity for cointegration of various quantities are discussed. The modeling and testing for risk premiums is surveyed. Included in this area are tests of the consumption CAPM, tests of the latent variable model, and portfolio-balance models of risk premiums. General equilibrium models of the risk premium are examined and their empirical implications explored. The survey does not cover the important areas of learning and peso problems, tests of rational expectations based on survey data, or the models of irrational expectations and speculative bubbles.

https://papers.ssrn.com/sol3/Delivery.cfm/nber_w5312.pdf?abstractid=225376&mirid=1

The Forward Discount Anomaly and the Risk Premium: A Survey of Recent Evidence

https://www.ssc.wisc.edu/~cengel/PublishedPapers/RiskPremiumSurvey.pdf

The forward discount anomaly and the risk premium: A survey of recent evidence

Exchange Policies for Less Developed Countries in a World of Floating Rates

International money markets and flexible exchange rates

Using a simple model of transactions costs in the interbank foreign exchange market and a model of vehicle currency use, the interaction between transactions costs and vehicle currency use is explored. The impact of volume on bid-ask spreads is estimated from cross-section time series data on seven currencies. Data on transactions costs and the currency denomination of trade and capital flows is used to estimate changes in the attractiveness of using the U.S. dollar as a vehicle between 1980 and 1987. The data suggest a modest reduction in the attractiveness of the dollar as a vehicle.

Transactions Costs and Vehicle Currencies

Section and chapter headings: Preface. Introduction (S.W. Black, M. Moersch). I Who Governs Firms? The changing role of banks and corporate governance in Germany: evolution towards the market? (U. Schroder, A. Schrader). The German system of corporate governance - a model which should not be imitated (E. Wenger, C. Kaserer). Is a supervisory board valuable? the French evidence (Gang Shyy, V. Vijayraghavan). II Financial Constraints and Investment Behavior. German investment financing: an international comparison (J. Corbett, T. Jenkinson). Investment, liquidity constraints, and bank relationships: evidence from German manufacturing firms (J.A. Elston). Financial structure, investment and economic growth in OECD countries (S.W. Black, M. Moersch). III Comparing Financial Systems and Regulatory Regimes. Universal versus specialized banks (A. Steinherr). Convergence of financial systems and regulatory policy challenges in Europe and in the United States (C. Dziobek, J.R. Garrett). The management of financial risks at German nonfinancial firms: the cast of metallgesellschaft (A.B. Frankel, D.E. Palmer). IV European Monetary Unification. Is a 2-speed system in Europe the answer to the conflict between the German and the Anglo-Saxon models of monetary control? (M. Demertzis et al.). Monetary integration between economies with different financial structures (S. Collignon). V Financial Structure for Transition Economies. Towards universal banking - risks and benefits for transition economies (C.M. Buch). Financial integration in North America and Europe among neighboring countries at different stages of development (G.M. von Furstenberg, B. Hofer). Index.

Stanley W. Black

Papers

Exchange Policies for Less Developed Countries in a World of Floating Rates

International money markets and flexible exchange rates

Transactions Costs and Vehicle Currencies

International money markets and flexible exchange rates

Competition and convergence in financial markets : the German and Anglo-American models