On the Indeterminacy of Equilibrium Exchange Rates

Kareken, John H.; Wallace, Neil

doi:10.2307/1882388

Cited by 346 publications

(199 citation statements)

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“…• This result is entirely analogous to that of Kareken and Wallace (1981); they call it the dominance result. Kareken and Wallace adopt the normaliza tion that the price of the single consumption good is unity in each period; hence, their result can be interpreted that the real exchange rate is constant.…”

Section: The Model and Equilibriummentioning

confidence: 67%

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Sustainable balance of trade deficits

Fisher

1990

Journal of Monetary Economics

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This paper analyzes a model of overlapping generations in which there are two currencies. There are two agents born in each period, and these agents have completely heterogeneous preferences and endowments. The paper shows that there are monetaly equilibria in which one country can sustain a trade deficit whose present value is arbitrarily close to that of its trading partner's entire stream of resources. Hence, there may be no limit to the present value of a country's trade deficit, even if the equilibrium for the world economy satisfies an intertemporal efficiency criterion.

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Section: The Model and Equilibriummentioning

confidence: 67%

“…The work of Kareken and Wallace (1981) is seminal; they showed that the equilibrium level of the exchange rate is indeterminate. Their model has one good per period and uses stationary preferences, endowments, and money-supply processes.…”

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confidence: 99%

Sustainable balance of trade deficits

Fisher

1990

Journal of Monetary Economics

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“…By making the euro a better direct substitute for the local currency, any attempt at inflationary financing would be reigned in by a shift in money demand away from the local currency and towards the euro. In the limit, any non-zero anticipated depreciation of the local currency against the euro would drive the demand for the local currency to zero; likewise, any non-zero anticipated appreciation of the local currency against the euro would reduce the local demand for euros for domestic transaction purposes down to zero -a pure Kareken and Wallace world (Kareken and Wallace [1981]). …”

Section: The Euro As Parallel Currency For Accession Countriesmentioning

confidence: 99%

Central Banking and the Choice of Currency Regime in Accession Countries

Buiter¹,

Grafe²

2001

ecofi

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Copyright reserved. Subject to the exception provided for by law, no part of this publication may be reproduced and/or published in print, by photocopying, on microfilm or in any other way without the written consent of the copyrightholder(s); the same applies to whole or partial adaptions. The publisher retains the sole right to collect from third parties fees payable in respect of copying and/or take legal or other actions for this purpose. Terms of use: Documents in AbstractThe subject matter of this paper is the design of appropriate Central Banking arrangements and exchange rate regimes for those former centrally planned Central and East European countries that are candidates for full membership in the European Union. We give an overview of the existing arrangements and point out to which extent monetary arrangements are restricted by conditions for entry both into the European Union and eventually into the European Monetary Union. Furthermore we investigate to which degree countries are fulfilling the accession criteria and compare their performance with the performance of earlier EU joiners like the countries of the Iberian Peninsula, Ireland and Greece.After concluding that the accession criteria do not necessarily favour a particular monetary regime, we analyse the pros and cons of the two regimes widely believed to be most stable: currency boards and inflation targeting. We find that under either regime tensions are likely to arise from the attempt to meet the accession criteria of a low inflation rate and a stable exchange rate. Due to likely large productivity gains in the traded goods sector the real exchange rate can be expected to display a trend appreciation. Thus a currency board arrangement may well fail to produce an inflation rate below the Maastricht ceiling, unless the economy is run with a wasteful amount of spare capacity. Similarly the credibility of any inflation target would be undermined by the requirement that the exchange rate be kept within a specified target zone. This conflict could be resolved if the inflation ceiling was re-specified in terms of traded goods price inflation (and preferable in terms of 'core' traded goods price inflation) but this would require a change in the Maastricht Treaty.

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“…Previous theoretical and empirical studies show that currency substitution could have significant effects on the independence of monetary policy and exchange rate stability under a flexible exchange rate system (e.g., Girton and Roper, 1981;Kareken and Wallace, 1981;Rogers 1990;Akçay, Alper, & Karasulu, 1997;Kumamoto & Kumamoto, 2004). For example, a high degree of currency substitution has been shown to cause the nominal interest rate to react strongly to even small monetary policy changes.…”

Section: Introductionmentioning

confidence: 99%

Recent Experiences with Currency Substitution

Kumamoto¹

2014

International Journal of Financial Research

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We empirically investigate recent experiences with currency substitution. We focus especially on the determinants of currency substitution, namely, the factors representing the usefulness of a foreign currency both as a medium of exchange and a store of value. This paper has three key distinguishing features. First, our sample includes eight developing and/or emerging countries from different regions to permit direct cross-country comparison, unlike in many previous studies. Second, this study covers a recent sample period. The U.S. dollar and the euro have been depreciating against other currencies since the 2007 financial crisis, and have therefore become less useful as a store of value. Therefore, it is important that we investigate whether the determinants of currency substitution have changed in recent periods. Third, we derive an estimated equation from the agent's utility maximization problem. In particular, we introduce the exchange rate risk premium as an alternative determinant, considering its relevance to the forward premium puzzle-the failure of the interest rate differential to correctly represent expected changes in the nominal exchange rate and hence the usefulness of foreign currency as a store of value. The empirical results indicate that the variables representing the usefulness of foreign currency both as a medium of exchange and a store of value are significant determinants of currency substitution. The results show that currency substitution has important monetary policy implications.

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On the Indeterminacy of Equilibrium Exchange Rates

Cited by 346 publications

References 1 publication

Sustainable balance of trade deficits

Sustainable balance of trade deficits

Central Banking and the Choice of Currency Regime in Accession Countries

Recent Experiences with Currency Substitution

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