Exchange Rate "Fundamentals" versus Speculation: The Case of Lebanon

International Monetary Fund

No 1988/109, IMF Working Papers from International Monetary Fund

Abstract: The exchange rate for the Lebanese pound experienced a protracted period of depreciation from end-1982 to November 1987, followed by a marked appreciation over the following six months. This paper investigates the competing hypotheses that the exchange rate over these two periods was driven by a speculative bubble versus “fundamental” economic variables. Reduced-form and time series models for the exchange rate are estimated and tested for nonstationarity. The results of these test suggest that the pound’s volatility in recent years was consistent with an excessive growth in domestic versus foreign currency denominated liquidity rather than speculation.

Keywords: WP; exchange rate; asset demand; foreign currency; speculative bubble; U.S. dollar; rate of exchange rate appreciation; Lebanese pound; Exchange rates; Nominal effective exchange rate; Asset bubbles; Domestic liquidity; Currencies (search for similar items in EconPapers)
Pages: 32
Date: 1988-01-01
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