Working Paper: NBER ID: w0983
Authors: Rudiger Dornbusch
Abstract: The paper reviews theoretical developments in the field of exchange rate theory and assesses the empirical evidence. Since the empirical evidence does not lend support to the models that have been formulated, a number of reasons for that failure are suggested. These include the argument that the current account has been overrated as an exchange rate determinant and that the role of "news" as yet remains to be tested in an extensive way. Four exchange rate problems are identified as possibly giving justification to exchange market intervention or other policies. They are the possibility of speculative bubbles, the peso problem, the use of irrelevant information and the problem of real appreciation in the case of monetarist stabilization. In each case the exchange rate can deviate from fundamentals, following the asset market rather than the goods market and thus disturbing macroeconomic equilibrium.
Keywords: exchange rates; speculative bubbles; peso problem; monetary policy
JEL Codes: F31; F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| speculative behavior (D84) | deviations in exchange rates (F31) |
| expectations (D84) | exchange rates (F31) |
| peso problem (C29) | exchange rates (F31) |
| public perceptions (E66) | exchange rates (F31) |
| anticipatory purchases of foreign exchange (F31) | anticipated fall in the exchange value (F31) |
| anticipated expansionary policies (E69) | current inflationary pressures (E31) |