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Indeterminacy and Volatility of Exchange Rates under Imperfect Currency Substitution

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  • Mahdavi, Mahnaz
  • Kazemi, Hossein B

Abstract

The authors know that, when currencies are perfect substitutes, exchange rates could become indeterminate. They show that, even when currencies are less than perfect substitutes, exchange rates could display volatility unrelated to economic fundamentals. With increases in currency substitution the exchange rate becomes more sensitive to changes in economic fundamentals, increasing its volatility; the exchange rate could become indeterminate and it is more likely to become so if governments pursue similar monetary policies; and currencies with high nominal interest rates would decline significantly and the exchange rate becomes more sensitive to changes in the supply of those currencies. Copyright 1996 by Oxford University Press.

Suggested Citation

  • Mahdavi, Mahnaz & Kazemi, Hossein B, 1996. "Indeterminacy and Volatility of Exchange Rates under Imperfect Currency Substitution," Economic Inquiry, Western Economic Association International, vol. 34(1), pages 168-181, January.
    • Handle: RePEc:oup:ecinqu:v:34:y:1996:i:1:p:168-81
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    Cited by:

    1. Komárek Luboš & Melecký Martin, 2001. "Currency Substitution in the Transition Economy : A Case of the Czech Republic 1993-2001," The Warwick Economics Research Paper Series (TWERPS) 613, University of Warwick, Department of Economics.
    2. Hisao Kumamoto & Masao Kumamoto, 2014. "Does Currency Substitution Affect Exchange Rate Volatility?," International Journal of Economics and Financial Issues, Econjournals, vol. 4(4), pages 698-704.
    3. repec:eco:journ1:2014-03-01 is not listed on IDEAS
    4. Hisao Kumamoto & Masao Kumamoto, 2017. "Currency Substitution and Monetary Policy Effects: The Case of Latin American Countries," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 9(2), pages 32-45, February.

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