Exchange Rate Dynamics
Exchange-rate dynamics refers to the response path of the exchange rate following the revelation of some economic shock when the country in question operates under a pure flexible exchange-rate system. The issue attracts research attention because of the volatile nature of the exchange rate and the belief that the exchange rate may affect the allocation of resources across countries and over time. If observed exchange-rate dynamics cannot be shown to have a rational basis, efficiency will suffer from decisions made conditioned on disequilibrium values of the exchange rate.
KeywordsBretton Woods system Dornbusch, R. Exchange rate overshooting Exchange rate volatility Exchange-rate dynamics Fixed exchange rates Flexible exchange rates Incomplete markets Local-currency pricing Monetary shocks Mundell–Fleming model New open-economy macroeconomics Producer-currency pricing Real exchange rates Redux model Risk aversion Sticky prices Uncertainty Uncovered interest parity Vector autoregressions
JEL ClassificationsF31 F4
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