IDEAS home Printed from https://ideas.repec.org/a/red/issued/v7y2004i3p687-706.html
   My bibliography  Save this article

Persistent, Nonfundamental Exchange Rate Fluctuations

Author

Listed:
  • Irasema Alonso

    (University of Rochester)

Abstract

A trading-post model of money is used to show how exchange rates can be affected by extrinsic uncertainty. With no uncertainty in fundamentals, we demonstrate that there exist equilibria where exchange rates as well as consumption allocations follow a stationary random process. The uctuations are permanent, and they affect economic welfare. These findings also apply when the currency supplies grow at different rates. Then, the only stationary equilibria in which both monies are valued are those with uctuations: the real value of the currencies follow a stationary process, and the average return on the fast-growing currency is lower than that of the slow-growing currency. (Copyright: Elsevier)

Suggested Citation

  • Irasema Alonso, 2004. "Persistent, Nonfundamental Exchange Rate Fluctuations," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 7(3), pages 687-706, July.
    • Handle: RePEc:red:issued:v:7:y:2004:i:3:p:687-706
    DOI: 10.1016/j.red.2003.12.003
    as

    Download full text from publisher

    File URL: http://dx.doi.org/10.1016/j.red.2003.12.003
    File Function: Full text
    Download Restriction: Access to full texts is restricted to ScienceDirect subscribers and ScienceDirect institutional members. See http://www.sciencedirect.com/ for details.
    File URL: https://libkey.io/10.1016/j.red.2003.12.003?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Martin Shubik, 2000. "The Theory of Money," Working Papers 00-03-021, Santa Fe Institute.
    2. John Kareken & Neil Wallace, 1981. "On the Indeterminacy of Equilibrium Exchange Rates," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 96(2), pages 207-222.
    3. Marco Bassetto, 2002. "A Game-Theoretic View of the Fiscal Theory of the Price Level," Econometrica, Econometric Society, vol. 70(6), pages 2167-2195, November.
    4. Manuelli, Rodolfo E & Peck, James, 1990. "Exchange Rate Volatility in an Equilibrium Asset Pricing Model," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 31(3), pages 559-574, August.
    5. King, Robert G. & Wallace, Neil & Weber, Warren E., 1992. "Nonfundamental uncertainty and exchange rates," Journal of International Economics, Elsevier, vol. 32(1-2), pages 83-108, February.
    6. Shubik, Martin, 1990. "A game theoretic approach to the theory of money and financial institutions," Handbook of Monetary Economics, in: B. M. Friedman & F. H. Hahn (ed.), Handbook of Monetary Economics, edition 1, volume 1, chapter 5, pages 171-219, Elsevier.
    7. Meese, Richard A. & Rogoff, Kenneth, 1983. "Empirical exchange rate models of the seventies : Do they fit out of sample?," Journal of International Economics, Elsevier, vol. 14(1-2), pages 3-24, February.
    8. Alonso Irasema, 2001. "Patterns of Exchange, Fiat Money, and Coordination," The B.E. Journal of Macroeconomics, De Gruyter, vol. 1(2), pages 1-33, September.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. M. Salto & T. Pietra, 2013. "Welfare and excess volatility of exchange rates," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 52(2), pages 501-529, March.
    2. Alexei Deviatov & Igor Dodonov, 2006. "Exchange-rate volatility, exchange-rate disconnect, and the failure of volatility conservation," Working Papers w0079, Center for Economic and Financial Research (CEFIR).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Alexei Deviatov & Igor Dodonov, 2006. "Exchange-rate volatility, exchange-rate disconnect, and the failure of volatility conservation," Working Papers w0079, New Economic School (NES).
    2. Arifovic, Jasmina, 1996. "The Behavior of the Exchange Rate in the Genetic Algorithm and Experimental Economies," Journal of Political Economy, University of Chicago Press, vol. 104(3), pages 510-541, June.
    3. Mauro Bambi & Sara Eugeni, 2021. "Nominal exchange rate determination and dynamics in an OLG framework," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 72(1), pages 93-132, July.
    4. M. Salto & T. Pietra, 2013. "Welfare and excess volatility of exchange rates," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 52(2), pages 501-529, March.
    5. Barnett, Richard C. & Ho, Mun S., 1996. "Sunspots, currency substitution, and inflationary finance," Journal of International Economics, Elsevier, vol. 41(1-2), pages 73-93, August.
    6. Richard Clay Barnett, 2003. "Smuggling, non-fundamental uncertainty, and parallel market exchange rate volatility," Canadian Journal of Economics, Canadian Economics Association, vol. 36(3), pages 701-727, August.
    7. Engel, C., 1996. "A Model of Foreign Exchange Rate Indetermination," Discussion Papers in Economics at the University of Washington 96-13, Department of Economics at the University of Washington.
    8. Mauro Bambi & Sara Eugeni, 2018. "Exchange rates, sunspots and cycles," Department of Economics Working Papers 2018_05, Durham University, Department of Economics.
    9. Ravikumar, B & Wallace, Neil, 2002. "A benefit of uniform currency," MPRA Paper 22951, University Library of Munich, Germany.
    10. SALTO, Matteo, 1998. "Indeterminacy of equilibrium allocations in monetary open economies," LIDAM Discussion Papers CORE 1998062, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    11. U. Michael Bergman & Shakill Hassan, 2008. "Currency Crises and Monetary Policy in an Economy with Credit Constraints: The No Interest Parity Case," EPRU Working Paper Series 08-01, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.
    12. Javier Bianchi & Saki Bigio & Charles Engel, 2021. "Scrambling for Dollars: International Liquidity, Banks and Exchange Rates," Working Papers 786, Federal Reserve Bank of Minneapolis.
    13. Uhlig, Harald & Xie, Taojun, 2020. "Parallel Digital Currencies and Sticky Prices," CEPR Discussion Papers 15619, C.E.P.R. Discussion Papers.
    14. Eugeni, Sara, 2024. "Nominal exchange rates and net foreign assets' dynamics: The stabilization role of valuation effects," Journal of International Money and Finance, Elsevier, vol. 141(C).
    15. Zhang, Cathy, 2014. "An information-based theory of international currency," Journal of International Economics, Elsevier, vol. 93(2), pages 286-301.
    16. Bruno Biais & Christophe Bisière & Matthieu Bouvard & Catherine Casamatta & Albert J. Menkveld, 2023. "Equilibrium Bitcoin Pricing," Journal of Finance, American Finance Association, vol. 78(2), pages 967-1014, April.
    17. Enrique Martínez García, 2008. "Globalization and monetary policy: an introduction," Globalization Institute Working Papers 11, Federal Reserve Bank of Dallas.
    18. Marco Bassetto & Thomas J. Sargent, 2020. "Shotgun Wedding: Fiscal and Monetary Policy," Annual Review of Economics, Annual Reviews, vol. 12(1), pages 659-690, August.
    19. Djeutem, Edouard & Kasa, Kenneth, 2013. "Robustness and exchange rate volatility," Journal of International Economics, Elsevier, vol. 91(1), pages 27-39.
    20. Head, Allen & Shi, Shouyong, 2003. "A fundamental theory of exchange rates and direct currency trades," Journal of Monetary Economics, Elsevier, vol. 50(7), pages 1555-1591, October.

    More about this item

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:red:issued:v:7:y:2004:i:3:p:687-706. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Christian Zimmermann (email available below). General contact details of provider: https://edirc.repec.org/data/sedddea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.