Recent Exchange Rate Experience and Proposals for Reform

Jeffrey Alexander Frankel ()

No C96-060, Center for International and Development Economics Research (CIDER) Working Papers from University of California at Berkeley

Abstract: The paper reviews the grounds for fears that foreign exchange markets are not behaving as well as they should: recent misalignments and crises, and seven sets of academic findings. (1) Exchange rate volatility is high, (2) with possible adverse effects. (3) Volatility cannot be explained by observable fundamentals, (4) and changes when the regime changes, even without a change in volatility of fundamentals. (5) Expectations appear to be biased. (6) Short-term expectations are destabilizing. And (7) the effect of changes in monetary policy on the exchange rate is drawn out over time, and is not instantaneous.

Date: Written 1996-01-01
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