Review of exchange-rate theories in four leading economics textbooks

Priewe, Jan

doi:10.4337/ejeep.2017.01.04

Cited by 3 publications

(4 citation statements)

References 14 publications

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“…Demand and supply of money in any given country depend on such factors like real income levels, general price levels, interest rates and decisions of monetary policy authorities, which ultimately means that foreign exchange rate is derived from the interaction between these factors for any two given countries. Priewe (2017) argues that advocates of monetary theory interpret exchange rate as the relationship of money stocks (money stock reflects the general price levels) of one country and the other. Thus, the differentials and interactions between money stocks of any two countries determine the rate of exchange for the currencies of the said countries.…”

Section: Literature Reviewmentioning

confidence: 99%

“…The exchange rate policy in Ghana since 1986 means that the rate is not controlled and therefore susceptible to fluctuations from one period to the other. Priewe (2017) emphasizes the importance of assessing distortions in the economy in determining exchange rate movements by criticizing strict adherence and lack of empirical support by some economics authors on the subject of exchange rate theories as discussed. This means that the subject of exchange rate determination should not be considered in isolation on theoretical basis but should be looked at holistically, in terms of deviations from fundamentals.…”

Section: Literature Reviewmentioning

confidence: 99%

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Exchange rate and inflation dynamics: does the month or quarter of the year matter?

2021

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This study examines whether there exists variation in the rate of changes in monthly currency exchange and inflation rates for the various months and quarters of the year. Monthly data were sourced from the time series data portal of Bank of Ghana and Ghana Statistical Service for USD/GHS rate and headline inflation respectively from March 1992 to December 2018. The study employs t-test, OLS regression and GARCH modelling techniques. The results indicate that over the period of the study, inflation was stable with insignificant changes observed between the various months and quarters of the year. For exchange rate however the changes were significant, with quarter 2 having the highest rate of change, followed by quarters 1, 4 and 3 in that order. The analyses also support the exchange rate pass-through in the long run as against the short-run since the changes observed between the two macroeconomic variables do not move in one direction at the same point in time. Both the exchange and inflation rates also displayed explosiveness in volatility shocks over the course of the period under study. Whilst the study confirmed the existence of leverage effect for the conditional volatility of monthly rate of inflation, we could not confirm same for conditional volatility of monthly exchange rate. With this information, businesses, households and policy makers in planning their yearly activities are to consider the observed trend of fluctuations in inflation and exchange rates. Accordingly, businesses should reformulate their strategies to time their international trading activities and payments to gain or mitigate against losses from the forex market. Policy makers could give guaranteed rates to such businesses and use this as a guide for managing their foreign reserves.

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Section: Literature Reviewmentioning

confidence: 99%

Section: Literature Reviewmentioning

confidence: 99%

Exchange rate and inflation dynamics: does the month or quarter of the year matter?

2021

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“…This approach implicates that the short run is only a temporary disequilibrium that leads after some time to a general macro equilibrium. The short-term disequilibrium is healed eventually by market forces (Priewe, 2017).…”

Section: The Condition Of Equilibrium Exchange Ratementioning

confidence: 99%

Determination of Equilibrium Exchange Rate Rupiah Against US Dollar and its Volatility: Application of Asset Approach

Mandeij¹

2020

Int. j. bus. adm. stud

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The prevailing exchange rate and volatility have always been an important issue in an open economy and freely floating exchange rate system, such as in Indonesia. In this system, the exchange rate fluctuates based on the interaction between demand for and supply of foreign currency in the foreign exchange market. Its fluctuation may influence many economic activities and can be transmitted to the inflation rate. This shows that the prevailing exchange rate and its volatility become a crucial variable that must be taken into account by all economic actors. This paper aims to describe the application of the asset approach in determining the equilibrium exchange rate Rupiah against US$ and analyze the factors that influence its volatility. The analysis method used is the applied method based on the theory of Uncovered Interest Parity (UIP) condition. The result shows that the actual exchange rate is completely different from the equilibrium exchange rate where Rupiah is undervalued towards US$. It reflects that the demand for US$ is greater than its supply which means that the foreign exchange market is not in equilibrium. When all else equal, a decrease in the Rupiah interest rate, an increase of the US$ interest rate and a rising in the expected future exchange rate, respectively, will depreciate Rupiah against US$. The changing of these three factors can show and describe clearly its effect on the volatility of the exchange rate. This paper has shown the application of the asset approach to determine the equilibrium exchange rate Rupiah against US$ and how it could be fluctuating based on the UIP condition.

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“…It is widely accepted, however, that exchange rate forecasts are no more accurate than those arising from a random walk in both short and medium term, and empirical validation is weak for long horizons. In 2017, a review of exchange rate theories in four leading economic textbooks revealed little empirical support for the theories examined, see Priewe (2017). There has been a general consensus about poor performance in comparison with benchmark random walk models for more than three decades, following seminal papers by Rogoff (1983a, 1983b).…”

Section: George E P Boxmentioning

confidence: 99%

Old shocks cast long shadows over the exchange rate

Egilsson

2019

Journal of Applied Economics

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We propose a new exchange rate model using interest rate differential (IRD) time series as the input, and we fit the new model with empirical data for calibration. We assume that exchange rate modeling cannot be based on the response to a single shock but must instead be based on the response to a series of shocks, as previous shocks could still be playing out and affecting the overall response. We extend the Dornbusch overshooting model and make adjustments to account for empirical findings. The new model is substantiated by empirical data from several currency areas and can explain the so-called exchange rate "puzzles". Based on the model, we derive a relationship that explains when no IRD will suffice to support a stable exchange rate, which also suggests when policy-makers could be tempted to widen the IRD continually.

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Review of exchange-rate theories in four leading economics textbooks

Cited by 3 publications

References 14 publications

Exchange rate and inflation dynamics: does the month or quarter of the year matter?

Exchange rate and inflation dynamics: does the month or quarter of the year matter?

Determination of Equilibrium Exchange Rate Rupiah Against US Dollar and its Volatility: Application of Asset Approach

Old shocks cast long shadows over the exchange rate

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