Exchange Rate Dynamics: A New Open Economy Macroeconomics Perspectives

by Hairault; Jean-OIiver

• ISBN13: 9780415298773
• ISBN10: 0415298776
• Format: Hardcover
• Copyright: 2004-02-19
• Publisher: Routledge

Summary

Are exchange rates determined by economic fundamentals or are they a prey to random speculative forces? Some economists assert that economic theory has so far performed poorly in explaining the dramatic increase in exchange rate volatility in the recent floating rate period. This book argues that modern macroeconomics theory does provide guidelines for understanding exchange rate fluctuations. Since the mid-1990s, there has been an outpouring of research that aims at laying new foundations for open-macroeconomic theory. The so-called "New Open Economy Macroeconomics" (NOEM) approach embeds micro-founded behavior into dynamic general equilibrium models. This provides a rich framework for thinking about exchange rate behavior and lays the groundwork for credible policy evaluation. This book shows how the most recent analytical tools proposed in this literature improve our understanding of exchange rate fluctuations. With contributions from an international array of thinkers, this impressive bookshall interest both students and researchers involved with Macroeconomics, Money and Banking as well as all those interested in International Finance, including financial institutions.

Table of Contents

List of figures	xi
List of tables	xiii
List of contributors	xiv
Preface	xv
Acknowledgments	xxi
PART I Exchange rate volatility and persistence	1	(178)
1 Net foreign assets and exchange rate dynamics: the monetary model revisited	3	(52)
MICHELE CAVALLO AND FABIO GHIRONI
1.1 Introduction	3	(4)
1.2 The model	7	(12)
1.3 The log-linear model	19	(8)
1.4 The exchange rate and net foreign assets with exogenous money supplies	27	(8)
1.5 Net foreign assets and exchange rate dynamics with endogenous interest rate setting	35	(11)
1.6 Conclusion	46	(1)
Appendix A: aggregate per capita net foreign assets in the initial period	47	(1)
Appendix B: determinacy of the exchange rate under endogenous interest rate setting	48	(4)
Notes	52	(3)
2 Dornbusch revisited	55	(29)
JEAN-OLIVIER HAIRAULT, LISE PATUREAU AND THEPTHIDA SOPRASEUTH
2.1 Introduction	55	(3)
2.2 The model	58	(11)
2.3 What drives exchange rate fluctuations?	69	(9)
2.4 Conclusion	78	(1)
Appendix A: stationarizing the model	79	(2)
Appendix B: steady-state equilibrium	81	(1)
Notes	82	(2)
3 Nominal wage rigidities in an optimizing model of an open economy	84	(22)
STEVE AMBLER AND EMMANUEL HAKIZIMANA
3.1 Introduction	84	(1)
3.2 The model	85	(8)
3.3 Model solution	93	(1)
3.4 Model calibration and parameter values	94	(1)
3.5 Numerical simulation results	95	(8)
3.6 Conclusion	103	(1)
Notes	104	(2)
4 Sources of exchange rate fluctuations: pricing-to-market versus non-tradables	106	(16)
JEAN-OLIVIER HAIRAULT AND THEPTHIDA SOPRASEUTH
4.1 Introduction	106	(1)
4.2 The model	107	(3)
4.3 Exchange rate determination	110	(9)
4.4 A quantitative evaluation	119	(1)
4.5 Conclusion	120	(1)
Notes	121	(1)
5 Sources of non-stationary real exchange rate fluctuations: elements of theory and some empirical evidence	122	(28)
PHILIPPE ANDRADE
5.1 Introduction	122	(2)
5.2 An open economy with translog preferences	124	(12)
5.3 Statistical approach	136	(3)
5.4 Empirical results	139	(9)
5.5 Conclusion	148	(1)
Notes	148	(2)
6 Beliefs-based exchange rate dynamics	150	(29)
FABRICE COLLARD AND PATRICK FÈVE
6.1 Introduction	150	(1)
6.2 The model economy	151	(5)
6.3 Dynamic properties	156	(6)
6.4 Exchange rate dynamics	162	(10)
6.5 Concluding remarks	172	(1)
Appendix A: equilibrium conditions	172	(1)
Appendix B: log-linear representation	173	(2)
Appendix C: proof of propositions	175	(1)
Notes	176	(3)
PART II Exchange rate regimes and monetary policy	179
7 Exchange rate regimes and international business cycles: some stylized facts	181	(23)
THEPTHIDA SOPRASEUTH
7.1 Introduction	181	(1)
7.2 Methodology	182	(3)
7.3 Impact of exchange rate regimes on volatility	185	(8)
7.4 Cross-country correlations	193	(8)
7.5 Conclusion	201	(1)
Appendix A: data	202	(1)
Appendix B: countries	203	(1)
Notes	203	(1)
8 A quantitative analysis of currency regimes	204	(20)
LUCA DEDOLA AND SYLVAIN LEDUC
8.1 Introduction	204	(2)
8.2 The model	206	(4)
8.3 Calibration	210	(3)
8.4 Findings	213	(7)
8.5 Conclusion	220	(1)
Appendix	221	(1)
Notes	222	(2)
9 Commitment, discretion and fixed exchange rates in an open economy	224	(24)
TOMMASO MONACELLI
9.1 Introduction	224	(2)
9.2 A small open economy model	226	(8)
9.3 Monetary policy, interest rate and the exchange rate	234	(4)
9.4 Monetary regimes and equilibrium dynamics	238	(7)
9.5 Conclusion	245	(1)
Notes	246	(2)
10 Price setting and optimal monetary cooperation: a New Keynesian perspective	248
MATTHIEU DARRACQ-PARIÈS
10.1 Introduction	248	(2)
10.2 The core model	250	(7)
10.3 Equilibrium	257	(8)
10.4 Optimal monetary cooperation	265	(10)
10.5 Cooperation gains and implementation of the optimal policy	275	(1)
10.6 Conclusion	276	(1)
Appendix A: approximation of the welfare function	277	(4)
Appendix B: derivation of the optimal policy under commitment	281	(2)
Notes	283	(1)
Bibliography	284	(11)
Index	295