Exchange Rate Economics
Much of the paper is devoted to expounding the standard model of the exchange rate accepted by most economists today. This regards the exchange rate as a forward-looking asset price. Its steady-state level is determined by the need to have a curren...
| Main Author: | |
|---|---|
| Format: | Working Paper |
| Language: | English en_US |
| Published: |
World Bank, Washington, DC
2017
|
| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/364601468331914407/Exchange-rate-economics http://hdl.handle.net/10986/28039 |
| Summary: | Much of the paper is devoted to
expounding the standard model of the exchange rate accepted
by most economists today. This regards the exchange rate as
a forward-looking asset price. Its steady-state level is
determined by the need to have a current account balance
that will keep the debt/gross domestic product (GDP) ratio
constant, while the path of adjustment toward this
steady-state level is determined by the representative
agent's rational expectation of what will happen
between now and the long run. The paper then examines a
number of criticisms of this model: that exchange rate
changes are driven by 'news' and will be
nonexistent in the absence of news; that it implies that
chartist rules will systematically lose money; and that it
leaves no room for 'bubble-and-crash' dynamics,
which appear to have occurred. An alternative
'behavioral' model that gives room for such
behavior is presented. The paper then argues that
overvaluation can thwart development through an attack of
'Dutch disease,' and discusses the role that
exchange rate policy may play in avoiding this outcome. This
demands primarily the use of nonmonetary instruments like
fiscal policy or capital controls, but the behavioral model
of the exchange rate implies that intervention can also play
a role. The paper also includes a discussion of the
alternative exchange-rate regimes available. |
|---|