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Exchange Rate Volatility and Misalignment: Evaluating Some Proposals for Reform

Jacob A. Frenkel and Morris Goldstein

No 2894, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: In this paper, we analyze several proposals for reducing the volatility and/or misalignment of key-currency exchange rates. The proposals examined are a system of target zones, the imposition of controls or taxes on international capital flows, and a strengthening of international coordination over economic policies. We also review key characteristics of the behavior of major-currency exchange rates over the period of floating rates and examine the various criteria or standards for drawing inferences about excess volatility and misalignment. In evaluating exchange rate volatility, attention is directed toward the influence of the exchange rate regime, to the behavior of fundamentals, to the volatility of both goods prices and other asset prices, to the costs of exchange rate volatility, and to the nature of shocks facing the economy. Turning to misalignment, we examine the strengths and weaknesses of the purchasing-power-parity approach, of the underlying balance approach, and of the sustainability approach. We argue that inferences about excess exchange rate volatility and misalignment are subject to wide margins of error and that the exchange rate experience of the past 15 years is subject to multiple interpretations.

Date: 1989-03
Note: EFG ITI IFM
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Citations: View citations in EconPapers (12)

Published as From Financial Market Volatility, (A Symposium Sponsored By The Federal Reserve Bank of Kansas City), pp. 185-220. Kansas City, MO: The Federal Reserve Bank of Kansas City, 1988.
Published as Jacob A. Frenkel & Morris Goldstein, 1988. "Exchange rate volatility and misalignment: evaluating some proposals for reform," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 185-231.

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Related works:
Chapter: Exchange Rate Volatility and Misalignment: Evaluating some Proposals for Reform (1991)
Journal Article: Exchange rate volatility and misalignment: evaluating some proposals for reform (1988)
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