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...

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Main Author:	Williamson, John
Format:	Working Paper
Language:	English en_US
Published:	World Bank, Washington, DC 2017
Subjects:	BUBBLE-AND-CRASH DYNAMICS DEBT-TO-GDP RATIO DUTCH DISEASE EXCHANGE RATE BEHAVIORAL MODEL EXCHANGE RATE POLICY EXCHANGE RATE STANDARD MODEL INTERVENTION OVERVALUATION
Online Access:	http://documents.worldbank.org/curated/en/364601468331914407/Exchange-rate-economics http://hdl.handle.net/10986/28039

id	okr-10986-28039
recordtype	oai_dc
spelling	okr-10986-280392021-04-23T14:04:46Z Exchange Rate Economics Williamson, John BUBBLE-AND-CRASH DYNAMICS DEBT-TO-GDP RATIO DUTCH DISEASE EXCHANGE RATE BEHAVIORAL MODEL EXCHANGE RATE POLICY EXCHANGE RATE STANDARD MODEL INTERVENTION OVERVALUATION 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. 2017-08-28T20:37:39Z 2017-08-28T20:37:39Z 2008 Working Paper http://documents.worldbank.org/curated/en/364601468331914407/Exchange-rate-economics http://hdl.handle.net/10986/28039 English en_US Commission on Growth and Development Working Paper;No. 2 All rights reserved The Peterson Institute for International Economics World Bank, Washington, DC Publications & Research :: Working Paper Publications & Research
repository_type	Digital Repository
institution_category	Foreign Institution
institution	Digital Repositories
building	World Bank Open Knowledge Repository
collection	World Bank
language	English en_US
topic	BUBBLE-AND-CRASH DYNAMICS DEBT-TO-GDP RATIO DUTCH DISEASE EXCHANGE RATE BEHAVIORAL MODEL EXCHANGE RATE POLICY EXCHANGE RATE STANDARD MODEL INTERVENTION OVERVALUATION
spellingShingle	BUBBLE-AND-CRASH DYNAMICS DEBT-TO-GDP RATIO DUTCH DISEASE EXCHANGE RATE BEHAVIORAL MODEL EXCHANGE RATE POLICY EXCHANGE RATE STANDARD MODEL INTERVENTION OVERVALUATION Williamson, John Exchange Rate Economics
relation	Commission on Growth and Development Working Paper;No. 2
description	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.
format	Working Paper
author	Williamson, John
author_facet	Williamson, John
author_sort	Williamson, John
title	Exchange Rate Economics
title_short	Exchange Rate Economics
title_full	Exchange Rate Economics
title_fullStr	Exchange Rate Economics
title_full_unstemmed	Exchange Rate Economics
title_sort	exchange rate economics
publisher	World Bank, Washington, DC
publishDate	2017
url	http://documents.worldbank.org/curated/en/364601468331914407/Exchange-rate-economics http://hdl.handle.net/10986/28039
_version_	1764466015846006784

Exchange Rate Economics

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