Exchange Rate Economics

John Williamson

No WP08-3, Working Paper Series from Peterson Institute for International Economics

Abstract: The paper summarizes the current theory of how a floating exchange rate is determined, dividing the subject into what determines the steady state and what determines the transition to steady state. The inadequacies of this model are examined, and an alternative “behavioral” model, which recognizes that the foreign exchange market is populated by both fundamentalists and chartists is presented. It is argued that the main importance of understanding the foreign exchange market for development strategy is to permit a correct appraisal of the dangers of Dutch disease. Empirically it seems that from the standpoint of promoting development it is preferable to have a mildly undervalued rate. The paper concludes by examining implications for exchange rate regimes.

Keywords: Exchange rates; behavioral model; Dutch disease (search for similar items in EconPapers)
JEL-codes: F31 F43 O24 (search for similar items in EconPapers)
Date: 2008-02
New Economics Papers: this item is included in nep-cba, nep-ifn and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (79)

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Related works:
Journal Article: Exchange Rate Economics (2009)
Book: Exchange Rate Economics (2008)
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