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Destabilizing Exchange Rate Speculation: A Counterexample To Milton Friedman

Lars Ljungqvist

No 292697, SSRI Workshop Series from University of Wisconsin-Madison, Social Systems Research Institute

Abstract: This paper constructs a counterexample to Milton Friedman's assertion that speculation must stabilize the exchange rate. It is shown that in the case of persistent shocks to monetary growth rates, currency speculators increase exchange rate volatility by buying "strong" currencies and selling "weak" currencies. On the other hand, Friedman's claim is supported in another example with transient monetary shocks. The exchange rate is then stabilized when speculators buy temporarily "weak" currencies in anticipation of their future appreciation.

Keywords: Research; Methods/; Statistical; Methods (search for similar items in EconPapers)
Date: 1993-05
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Persistent link: https://EconPapers.repec.org/RePEc:ags:uwssri:292697

DOI: 10.22004/ag.econ.292697

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