Rational Speculators and Exchange Rate Volatility

J.A. Carlson and C.L. Olser

Working Papers from Purdue University, Krannert School of Management - Center for International Business Education and Research (CIBER)

Abstract: This paper suggests a structural connection between rational speculative activity and exchange rate volatility. We note that, when Friedman originally claimed that rational speculators must smooth exchange rate, he excluded interest rate differentials form his interpretation of speculator behavior. If interest rates matter, rational speculators could sometimes violate Friedman's description, and buy a currency whose value is relatively high or sell a currency whose value is low.

Keywords: EXCHANGE; RATE (search for similar items in EconPapers)
JEL-codes: F31 G12 (search for similar items in EconPapers)
Date: 1997
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Persistent link: http://EconPapers.repec.org/RePEc:fth:purkib:97-005

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