Five Common Myths About Floating Exchange Rates

In this article we have examined five common myths concerning floating exchange rates that arise from such incomplete understanding

Dallas S. Batten; Mack Ott

2018

Scholarcy highlights

  • ORE than a decade has passed since the demise of the Bretton Woods system of fixed exchange rates.1 Because ofits demonstrated inability to provide for the institutional adjustment of exchange rates necessary to incorporate change, there is general agreement that the Bretton Woods system, under which world trade was organized from 1945 to 1971, could not have been maintained.2 the viability of the system of floating exchange rates is buttressed by both a massive
  • Units Predicted,” The Wall implies that exchange rates will move to offset changes in inflation rate differentials, as we saw in chart 2, a rise in the U.S inflation rate relative to those of other countries will he associated with a fall in the exchange value of the dollar
  • interest rate parity implies that a rise in the real interest rate in the United States relative to that of other countries will cause the exchange value of the dollar to rise
  • Board of Governors at the Federal Reserve System and Dcp a,tnent at Comn,erce, B neat at Fco,omic Analysis, Survey at Curren ceive imseome from assets held in foreign economies; these service exports — the services ofthe American-owned capital in foreign countries — offset mcrchandise imports and allow the United States to run a persistent merchandise deficit without necessarily inducing a decline in the exchange rate
  • In this article we have examined five common myths concerning floating exchange rates that arise from such incomplete understanding
  • Either misapprehension ofthe actual forces — say, nominal as opposed to real interest rate differentials — or an incomplete specification of the determination of exchange rates — a trade flow approach as opposed to an asset market approach — will produce a fatilty unders’tandimsg of why exchange rates move and how these movesnents affect the domestic economy

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