The Theory and Empirics of Exchange Rates

The following sections are included:

• Preface

• Contents

• List of Tables

• List of Figures

• List of Acronyms

• Currency Abbreviations

The following sections are included:

• Introduction

• The Importance of Exchange Rates
  • The Exchange Rate and Business Operations
  • The Exchange Rate and Macroeconomic Policy
  • Macroeconomic Linkages Through Exchange Rates

• Stylized Facts and Figures
  • Stylized Facts: Exchange Rates Only
  • Stylized Facts: Spot Rates, Forward Rates, and Macroeconomic Variables

• Exchange Rates and Other Financial Prices: The Subprime Crisis as an Example

• Exchange Rate Regimes
  • Exchange Rate Regime Classification
  • Exchange Rate Regime Verification

• What Is to Come

The following sections are included:

• Introduction

• Disequilibrium Systems and Alternative Adjustment Mechanisms

• Efficacy of Fixed and Flexible Exchange Rates

• Dynamic Adjustment Under Fixed and Flexible Exchange Rates

• Dynamic Adjustment and the Role of Capital Mobility

• The Appropriate Use of Monetary and Fiscal Policies

• Stabilization Policies Under Fixed and Flexible Exchange Rates

• The Standard Mundell–Fleming Model
  • Fundamental Propositions of the Mundell–Fleming Model
  • The Structure of the Mundell–Fleming Model

• The Reduced Form Equation of the Equilibrium Exchange Rate
  • The Current Account
  • The Capital Account

• Stabilization Policies Under Alternative Exchange Rate Regimes
  • Fixed Exchange Rates, Capital Mobility and Stabilization Policies
  • Flexible Exchange Rates, Capital Mobility, and Stabilization Policies

• A Critique of Mundell's Results About Stabilization Policies
  • McLeod's Critique of Mundell's Results
  • Niehans's Doubts About the Efficacy of Monetary Policy

• Recapitulation

The following sections are included:

• Introduction

• Key Propositions of the Flexible-Price Monetary Model

• The Specification of the Flexible-Price Monetary Model

• A Digrammatic Representation of the Flexible-Price Monetary Model

• Some Variants of the Flexible-Price Monetary Model
  • The Rational Expectations Monetary Model
  • Frankel's Flexible-Price Monetary Model with a Wealth Effect
  • A General Monetary Model of Exchange Rates

• Policy Implications of the Flexible-Price Monetary Model

• Recapitulation

The following sections are included:

• The Price-Specie Flow Mechanism

• The Elasticities Approach and the J-Curve Effect

• The Keynesian Multiplier Approach

• The Income Absorption Approach

• The Monetary Approach to the Balance of Payments
  • Fundamental Propositions of the Monetary Approach
  • A Simple Monetary Model of the Balance of Payments
  • A Diagrammatic Representation of the Monetary Approach
  • An Expanded Monetary Model of the Balance of Payments
  • Policy Implications of the Monetary Approach

• A Comparison of the Monetary and Keynesian Models

• A Synthesis of Monetary and Keynesian Approaches

• Recapitulation

The following sections are included:

• Introduction

• Fundamental Propositions of the Dornbusch Model

• In Defense of the Mundell–Fleming Model
  • A Restatement of the Mundell–Fleming Model
  • Exchange Rate Expectations and Adjustment to Monetary Expansion
  • Failure of the Marshall–Lerner Condition
  • Exchange Rate Overshooting and Aggregate Spending

• Short- and Long-Run Views of Exchange Rates
  • Exchange Rate Determination in the Short Run
  • Exchange Rate Determination in the Long Run
  • Interaction Between Goods and Asset Markets

• The Overshooting Model of Exchange Rates
  • The Structure of the Dornbusch Model
  • Adjustment to Monetary Expansion

• The Reduced Form Equation of the Equilibrium Exchange Rate

• Recapitulation

The following sections are included:

• Introduction

• The Real Interest Differential Monetary Model
  • Moderate Inflation and the Exchange Rate Expectations Scheme
  • A More General Model of Exchange Rate Determination

• Driskell's Generalized Stock-Flow Sticky-Price Model
  • The Dornbusch Model in Discrete Time
  • The Stock-Flow Model

• The Equilibrium Real Exchange Rate Monetary Model
  • The Expectation Mechanism and Exchange Rate Determination
  • The Equilibrium Real Exchange Rate and Current Account
  • The Reduced-Form Equation of Exchange Rate Determination
  • The Impact of the Risk Premium on the Exchange Rate

• The Buiter–Miller Model with Core Inflation Rate

• Frankel's Sticky-Price Model with a Wealth Effect

• Recapitulation

The following sections are included:

• Introduction

• The Exchange Market Pressure Model of Exchange Rates

• Exchange Market Pressure and Monetary Independence

• A Simple Version of the Girton–Roper Market Pressure Model

• An Expanded Version of the Girton–Roper Market Pressure Model

• Recapitulation

The following sections are included:

• Introduction

• The Portfolio Balance Effect of Wealth and the Exchange Rate

• The Current Account in the Portfolio Balance Model

• The Structure of the Portfolio Balance Model

• Short-Run Properties of the Portfolio Balance Model

• Stable Portfolio Balance and Short-Run Exchange Rate Determination

• Monetary Policy Effects on Exchange and Interest Rates
  • Monetary Expansion via Open Market Purchases of Domestic Bonds
  • Monetary Expansion via Open Market Purchases of Foreign Bonds
  • Sterilized Open Market Foreign Exchange Operations
  • A Rise in Wealth via Accumulation of Foreign Assets

• Fiscal Policy Effects on Exchange and Interest Rates
  • Money-Financed Government Budget Deficit
  • Bond-Financed Government Budget Deficit

• Alternative Specifications of the Portfolio Balance Model

• A Synthesis of the Monetary and Portfolio Balance Models

• The Portfolio Balance Model with a Banking Sector
  • The Model
  • The Impact of Monetary Policy on Exchange and Lending Rates

• The Portfolio Balance Model with Bank Lending

• Recapitulation

The following sections are included:

• Introduction

• Currency Substitution and Dollarization

• Implications of Currency Substitution

• Determinants of Currency Substitution

• Exchange Rate Determination Under Currency Substitution

• The Calvo–Rodriguez Overshooting Currency Substitution Model
  • Assumptions of the Model
  • The Asset Market
  • The Goods Market
  • A Diagrammatic Illustration of the Currency Substitution Model

• The Importance of Currency Substitution in a Regional Setting

• Some Policy and Analytical Issues Related to Currency Substitution
  • Should Currency Substitution be Encouraged?
  • Discouraging the Use of Foreign Currencies
  • Currency Substitution and Nominal Anchors
  • Monetary Expansion and the Real Exchange Rate
  • Inflationary Finance under Currency Substitution

• Recapitulation

The following sections are included:

• Macroeconomic Models: Failure and Alternatives

• The Microstructure Models of Exchange Rates
  • Assumptions of Microstructure Models
  • Exchange Rate Determination in Microstructure Models
  • Information Models versus Inventory Models

• Factors Affecting Exchange Rates in Microstructure Models
  • Order Flow
  • The Bid–Offer Spread

• The Microstructure Solution to the Determination Puzzle

• The Microstructure Solution to the Excess Volatility Puzzle

• The Microstructure Solution to the Forward Bias Puzzle
  • The Statistician's Perspective on Forward Bias
  • The Economist's Perspective on Forward Bias
  • The Practitioner's Perspective: Limits to Speculation
  • A Simple Explanation: Model Misspecification

• Recapitulation

The following sections are included:

• Introduction

• The Role of News in Macroeconomic Models of Exchange Rates
  • The News Framework of the Flow Model
  • The News Framework of the Monetary Models
  • The News Framework of the Portfolio Balance Models

• The Role of News in the Microstructure Models of Exchange Rates
  • The Link Between Macroeconomic Fundamentals and Exchange Rates
  • The Link Between Order Flow and Macroeconomic News

• Recapitulation

The following sections are included:

• Evidence on the Mundell–Fleming Model

• Evidence on the Monetary Model of Exchange Rates
  • Evidence Based on Conventional Econometric Methods
  • Out-of-Sample Forecasting
  • Cointegration-Based Dynamic Models
  • Simultaneous Equation Models

• Evidence on the Monetary Model Under Rational Expectations

• Evidence on the Monetary Model Allowing for Currency Substitution

• Evidence on the Portfolio Balance Model

• Evidence on the Role of News

• Evidence on the Exchange Market Pressure Model

• Recapitulation

The following sections are included:

• Introduction

• The Explanatory Power of Order Flow

• Order Flow and Other Characteristics of Exchange Rates

• The Forecasting Power of Order Flow

• The Micro Impact of Macroeconomic News on Exchange Rates
  • Macroeconomic Fundamentals-Related News and Exchange Rate Changes
  • Macroeconomic Announcements and Exchange Rates
  • Macroeconomic News and Exchange Rate Mean and Variance
  • Macroeconomic Announcements, Order Flow, and Exchange Rates

• A Microstructure Test of International Financial Integration

• Recapitulation

The following sections are included:

• Where Do We Stand?

• Rational Expectations in the Foreign Exchange Market

• Exchange Rate Peculiarities

• Pitfalls in Exchange Rate Economics

• Alternative Approaches to Exchange Rates
  • The Post-Keynesian Approach
  • The Behavioral Finance Approach to Exchange Rates
  • Chaos Theory

• Do Macroeconomic Fundamentals Matter?

• Concluding Remarks

The following sections are included:

• References

• Index