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 developed a monetary approach to the theory of currency devaluation, where the role of the real balance effect was emphasized and a distinction was drawn between the relative prices of goods, the exchange rate and the price of money in terms of goods.
Abstract: This paper develops a monetary approach to the theory of currency devaluation.1 The approach is "monetary" in several respects. The role of the real balance effect is emphasized and a distinction is drawn between the relative prices of goods, the exchange rate and the price of money in terms of goods. Furthermore, money is treated as a capital asset so that the expenditure effects induced by a monetary change are spread out over time and depend on the preferred rate of adjustment of real balances.2 The latter aspect gives rise to the analytical distinction between impact and long-run effects of a devaluation. The first part of this paper develops a one-commodity and two-country model of devaluation. The simplicity of that structure is chosen quite deliberately to emphasize the monetary aspect of the problem as opposed to the derivative effects that arise from induced changes in relative commodity prices. Trade is viewed as the exchange of goods for money or a means of redistributing the world supply of assets. A devaluation is shown to give rise to a change in the level of trade and the terms of trade, the price of money in terms of goods. In the second part the implications of the existence of nontraded goods are investigated, and induced changes in the relative prices of home goods enter the analysis.
271 citations
TL;DR: This paper showed that the forward premium is always a biased predictor of future depreciation; the bias can be so severe as to lead to negative coefficients in the Fama regression, and that delayed overshooting may or may not occur depending upon the persistence of interest rate innovations and the degree of misperception.
271 citations
TL;DR: In this paper, the authors examined the short and long-run relationships between trade balance, real exchange rates, income and money supply in the case of Malaysia using the bound testing approach to cointegration and error correction models.
Abstract: This paper examines the short- and long-run relationships between trade balance, real exchange rates, income and money supply in the case of Malaysia. The inclusion of income and money variables in the study is purposely to examine the monetary and absorption approaches to the balance of payments beside the conventional approach of elasticity, using exchange rates. Using the bound testing approach to cointegration and error correction models, developed within an autoregressive distributed lag (ARDL) framework, we investigate whether a long-run equilibrium relationship exists between trade balance and the determinants. Additionally, we adopt an innovation accounting by simulating variance decompositions (VDC) and impulse response functions (IRF) for further inferences. Using this approach, we find evidence of a long-run relationship between trade balance and income and money supply variables but not between trade balance and real exchange rate. The findings also suggest that Marshall–Lerner condit...
271 citations
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TL;DR: In this paper, the authors argue that allowing for the possibility of a self-fulfilling panic helps in understanding several features of the recent Mexican crisis, and they present a simple model to explain how and why multiple equilibria can occur for some levels of reserves or debt, but not for others.
Abstract: We argue that allowing for the possibility of a self-fulfilling panic helps in understanding several features of the recent Mexican crisis. Self-fulfilling expectations became decisive in generating a panic only after the government ran down gross reserves and ran up short-term dollar debt. We present a simple model to explain how and why multiple equilibria can occur for some levels of reserves or debt, but not for others. Lastly, we argue that the imperfect credibility of Mexican exchange rate policy made it advisable to follow more contractionary fiscal and monetary policies in 1994. Our model formalizes the reasons why this is so.
271 citations
TL;DR: The authors developed a simple general equilibrium framework to study the effect of the exchange rate system on trade and welfare and found that trade is unaffected by the exchange-rate system, consistent with most evidence.
Abstract: We develop a simple general equilibrium framework to study the effect of the exchange rate system on trade and welfare. An important feature of the model is deviations from purchasing power parity, caused by rigid price setting in buyers' currency. We find the following. First, exchange rate stability is not necessarily associated with more trade.In a simple benchmark model with separable preferences and only monetary shocks, trade is unaffected by the exchange rate system, consistent with most evidence. Second, both trade and welfare can be higher under either exchange rate system, depending on preferences and on the monetary policy rules followed under each system. Finally, in general there is no one-to-one relationship between the levels of trade and welfare across exchange rate systems.
270 citations