Exchange Rate "Fundamentals" versus Speculation in a Developing Economy: An Illustrative Example Using Lebanese Data

Christopher M. Towe
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Christopher M. Towe: International Monetary Fund

IMF Staff Papers, 1989, vol. 36, issue 3, 678-707

Abstract: Competing hypotheses about what causes excessive exchange rate volatility--speculative bubbles or "fundamental" economic variables--are examined for the Lebanese pound during its protracted depreciation from end-1982 to November 1987 and its marked appreciation over the following six months. Reduced-form and time-series models of the exchange rate are estimated and tested for nonstationarity. The results suggest that much of the pound's volatility was consistent with excessive growth in domestic-versus foreign-currency-denominated liquidity rather than speculation.

Date: 1989
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