Speculative behavior of foreign exchange rates during the current float (original) (raw)

A survey of market practitioners’ views on exchange rate dynamics

Journal of International Economics, 2000

We report some findings from a survey of practitioners in the interbank foreign exchange markets in Hong Kong, Tokyo, and Singapore. The respondents contend that liquidity and market uncertainty are two important reasons for deviating from the conventional interbank bid-ask spread. A strong customer base is perceived as a source of competitive advantage for large participants. Most respondents agree that non-fundamental factors have pervasive impacts on short-run exchange rates. Speculation is believed to increase volatility but also improve market liquidity and efficiency. Despite their claim that intervention exacerbates volatility, more than one-half of the respondents suggest official intervention helps restore equilibrium.

To Float or to Trail: Evidence on the Impact of Exchange Rate Regimes

SSRN Electronic Journal, 2000

implications of these channels in terms of long-run growth performance are not obvious, there is some evidence of a negative link between output volatility and growth. 4 On the other hand, by reducing relative price volatility, a peg is likely to stimulate investment and trade, thus increasing growth. 5 Lower price uncertainty, usually associated with fixed exchange rate regimes, should also lead to lower real interest rates, adding to the same effect. Moreover, (credible) fixed exchange rate regimes are usually assumed to contribute to monetary policy discipline and predictability, and to reduce a country's vulnerability to speculative exchange rate fluctuations, all factors that are conducive to stronger growth performance. 6

Harry Johnson’s “Case for Flexible Exchange Rates” – 50 Years Later

RePEc: Research Papers in Economics, 2020

and the 22nd Central Bank Macroeconomic Workshop held at the Central Bank of Armenia in September 2019. Support from the Class of 1958 chair at UC Berkeley is acknowledged with thanks. The views expressed herein are those of the author and do not necessarily reflect the views of the National Bureau of Economic Research. The author has disclosed a financial relationship of potential relevance for this research. Further information is available online at http://www.nber.org/papers/w26874.ack NBER working papers are circulated for discussion and comment purposes. They have not been peerreviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.

How tight should one's hands be tied? Fear of floating and credibility of exchange rate regimes

2003

This paper analyzes the linkages between the credibility of a target zone regime, the volatility of the exchange rate, and the width of the band where the exchange rate is allowed to fluctuate. These three concepts should be related since the band width induces a trade-off between credibility and volatility. Narrower bands should give less scope for the exchange rate to fluctuate but may make agents perceive a larger probability of realignment which by itself should increase the volatility of the exchange rate. We build a model where this trade-off is made explicit. The model is used to understand the reduction in volatility experienced by most EMS countries after their target zones were widened on August 1993. As a natural extension, the model also rationalizes the existence of non-official, implicit target zones (or fear of floating), suggested by some authors.

The Transition from Fixed to Flexible Exchange Rates and Its Global Impact

The shift from fixed to flexible exchange rates, which began in the early 1970s, marked a transformative period in global economic policy. This transition was driven by the need for greater national economic policy flexibility and the growing interconnectedness of global financial markets. Initially, economists anticipated that flexible exchange rates would enable governments to pursue tailored economic policies, free from the constraints of the fixed exchange rate system established under Bretton Woods. They believed this flexibility would foster economic stability and growth by allowing countries to adapt their policies to domestic conditions. However, the anticipated benefits of the flexible exchange rate system were tempered by several unforeseen challenges. The mid-1970s financial revolution, characterized by the expansion of the Eurodollar market, deregulation, and technological advancements in financial instruments, led to an unprecedented increase in international financial flows. This surge contributed to greater exchange rate volatility, as financial flows became a dominant force in determining currency values, overshadowing traditional trade flows. The phenomenon of "overshooting" exacerbated this volatility, making it difficult for exchange rates to stabilize. The increased volatility of exchange rates had significant implications for both domestic and international economics. The interconnectedness of global financial markets meant that macroeconomic policies in one country could have substantial spillover effects on others, complicating the management of national economies. In response to these challenges, regional efforts such as the European Monetary System (EMS) were established to stabilize currencies within specific regions and mitigate the impact of global economic fluctuations. Despite these regional initiatives, the international monetary system continued to face instability and inefficiencies. The ongoing debate over the effectiveness of flexible exchange rates and the need for reform underscores the complexity of managing a global economy characterized by high levels of financial integration and volatility. The pursuit of a more stable and rule-based international monetary system remains a critical issue for policymakers worldwide.

EXCHANGE RATE VOLATILITY: CAUSES, CONSEQUENCES & MANAGEMENT-AN OVERVIEW

Economic Papers: A journal of applied economics and policy, 2001

For countries adhering to floating exchange rates, exchange rate volatility is an in escapable fact of life. It is not, of itself, a bad thing-since exchange rate movements are part of the adjustment mechanism through which economies react and readjust to new information and economic shocks. Nevertheless, there are some who would argue that exchange rates are too volatile, given the underlying economic fundamentals, and exchange rate volatility creates significant management problems for financial institutions, businesses, and economic policy makers. For these reasons, and in the light of the significant exchange rate movements over the previous year, exchange rate volatility was chosen as the theme of the 10th Melbourne Money and Finance Conference,' held in December 2000. This issue of Economic Papers contains revised and edited versions of the papers presented at the conference.* What then are the factors driving the variability in exchange rates? The first paper by Tony Makin provides an overview of the determinants of the exchange rate. For a commodity currency such as the $A, the main factors are the terms of trade, inflation and interest differentials, and for very shortterm volatility, news. More generally, Makin views the exchange rate as the price that adjusts to equalise foreign exchange flows arising from the current and capital accounts. Consequently, the effects of factors on the exchange rate may be understood by analysing their role in the savings and investment decisions.

Exchange rate regimes in the modern era: fixed, floating, and flaky

2011

Abstract: This paper provides a selective survey of the incidence, causes, and consequences of a country's choice of its exchange rate regime. I begin with a critical review of Michael Klein and Jay C. Shambaugh's (2010) book Exchange Rate Regimes in the Modern Era, and then proceed to provide an alternative overview of what the economics profession knows and needs to know about exchange rate regimes.

Flexible Exchange Rates in the 1970's

1980

The 1970's witnessed the dramatic evolution of the international monetary system from a regime of pegged exchange rates into a regime of flexible rates. This paper surveys the key issues and lessons from the experience with floating rates during the 1970's. The main orientation is empirical and the analysis is based on the experience of the three exchange rates: the Dollar/Pound, the Dollar/French Franc, and the Dollar! DM. The first issue that is being examined is the efficiency of the foreign exchange market and the degree of exchange rates volatility. The analytical framework emphasizes that exchange rates are the prices of assets that are traded in organized markets and are strongly influenced by expectations about future events. The principal finding is that the behavior of the foreign exchange market has been broadly consistent with the efficient market hypothesis. The second issue concerns the relationship between exchange rates and interest rates. It is shown that during the inflationary period of the 1970's, exchange rates and interest rates were positively correlated. This positive association is interpreted in terms of the role played by inflationary expectations. The analysis draws a distinction between expected and unexpected changes in interest rates; it is demonstrated that changes in exchange rates are strongly associated with the unexpected component of changes in the interest rates. The third issue concerns the relationship between exchange rates and prices. It is shown that the experience of the 1970's does not support the prediction of the simple version of the purchasing power parity theory and that the deviations from purchasing power parities can be characterized by a first-order autoregressive process. These deviations are then interpreted.