Topic
Exchange rate
About: Exchange rate is a research topic. Over the lifetime, 47255 publications have been published within this topic receiving 944563 citations. The topic is also known as: foreign-exchange rate & forex rate.
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TL;DR: In this article, the authors focus on the rationality of inflation expectations, i.e., the extent to which agents form expectations without making systematic mistakes in their beliefs about what inflation will be.
Abstract: of real interest rates and cash flows for decisions concerning investment expenditures. International capital flows and exchange rate movements hinge in large part on expected real yield differentials across countries. The Federal Reserve needs reliable measures of expected inflation to formulate and gauge the thrust of monetary policy. In fact, inflation expectations have become more important to the Fed given the diminished stability of the link between the monetary aggregates and GDP expenditures since the early 1980s, and the greater role which has been thrust upon expected real short-term interest rates in the implementation of Federal Reserve policy. The issue of rationality of inflation expectations-that is, the extent to which agents form expectations without making systematic mistakes in their beliefs about what inflation will be-is important. If inflation expectations are formed rationally, labor and financial markets will strongly tend to neutralize the potential redistributive effects of inflation over time. Financial capital will flow efficiently within and across national borders. Moreover, some of the stronger claims of new classical macroeconomics, like the claim that only unexpected monetary policy actions will
294 citations
TL;DR: In this paper, the determinants of FDI for Malaysia were examined using annual time series data for the period 1960-2005, and the results suggest that increases in the level of financial development, infrastructure development, and trade openness promote FDI.
294 citations
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TL;DR: The authors discusses the exchange rate economics and empirically tests the explanatory power of theory using the dollar-mark exchange rate using the explanatory variables are relative nominal money supplies, relative real income levels, and nominal long-term and short-term interest differentials.
Abstract: Publisher Summary This chapter discusses the exchange rate economics. There are basically three views of the exchange rate. The first takes the exchange rate as the relative price of monies, and the second as the relative price of goods. An increase in the money supply at home leads to an equiproportionate depreciation. As an increase in domestic real income raises the demand for real balances and thus leads to a fall in domestic prices, it induces an offsetting exchange appreciation. Relatively higher domestic interest rates, by contrast, reduce the demand for real balances, raise prices, and therefore bring about exchange depreciation. There are two ways to test the monetary approach. Instantaneous purchasing power parity (PPP) is an essential part of the monetary approach and directly tests whether PPP prevails. The alternative approach to testing the monetary theory relies on evidence from regression equations. The empirical evidence tests the explanatory power of theory using the dollar-mark exchange rate. The explanatory variables are relative nominal money supplies, relative real income levels, and nominal long-term and short-term interest differentials.
293 citations
TL;DR: The empirical evidence strongly rejects the hypothesis of real rate equality and the joint hypotheses of uncovered interest parity and ex ante relative PPP as discussed by the authors, or the unbiasedness of forward rate forecasts.
Abstract: This paper conducts empirical tests of the equality of real interest rates across countries. The empirical evidence strongly rejects the hypothesis of real rate equality and the joint hypotheses of uncovered interest parity and ex ante relative PPP, or the unbiasedness of forward rate forecasts and ex ante relative PPP. The evidence suggests that it is worth studying open economy macroeconomic models which allow: 1) domestic real rates to differ from world rates, 2) time varying risk premiums in the forward market, or 3) deviations from ex ante relative PPP. THE RELATIONSHIP OF REAL interest rates across countries is of central importance to our understanding of open economy macroeconomics. In some models where there is costless international arbitrage in goods and financial assets, real interest rates for comparable securities should be equal across countries. This has been a feature of much of the early research in the monetary approach to exchange rates, e.g., Frenkel [11] and Bilson [2]. On the other hand, finance theory indicates that risk premia may well differ for comparable securities denominated in different currencies (Solnick [27], Roll and Solnick [26], Stulz [28], Fama and Farber [7], Hansen and Hodrick [17], and Dornbusch [6]), and more recent theoretical models in the exchange rate literature, such as Dornbusch [5], Frankel [10], and Mussa [24], depend on real rates differing between countries in the short run. The proposition that real rates are equal across countries is worth studying
293 citations
TL;DR: The authors empirically studied the sensitivity of local interest rates to international interest rates and how that sensitivity is affected by a country's choice of exchange rate regime, finding that interest rates are typically lower in economies with fixed exchange rates than in those with flexible exchange rates.
293 citations