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Theories, Consistent Expectations and Exchange Rate Dynamics

In: Open-Economy Macroeconomics

Author

Listed:
  • Michael Goldberg

    (New York University)

  • Roman Frydman

    (University of New Hampshire)

Abstract

It has been apparent for some time now that the standard asset market models of exchange rate determination provide poor descriptions of exchange rate behaviour. These models are usually solved using the rational expectations hypothesis (REH) and it seems natural to inquire whether the problem lies in part with the expectational assumption. Studies that undertake this line of analysis in the exchange rate literature include Frankel and Froot (1987) and Kirman (1990). In this chapter we pursue this line of research and explore the implications of an alternative expectational assumption, recently proposed in Frydman and Phelps (1990) called the theories consistent expectations hypothesis (TCEH). We show that using the TCEH to close the monetary models of the exchange rate brings their implications more closely in line with the empirical record.

Suggested Citation

  • Michael Goldberg & Roman Frydman, 1993. "Theories, Consistent Expectations and Exchange Rate Dynamics," International Economic Association Series, in: Helmut Frisch & Andreas Wörgötter (ed.), Open-Economy Macroeconomics, chapter 20, pages 377-399, Palgrave Macmillan.
    • Handle: RePEc:pal:intecp:978-1-349-12884-6_20
    DOI: 10.1007/978-1-349-12884-6_20
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    Citations

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    Cited by:

    1. Frankel, Jeffrey, 1995. "How Well Do Foreign Exchange Markets Function: Might a Tobin Tax Help?," Center for International and Development Economics Research (CIDER) Working Papers 233420, University of California-Berkeley, Department of Economics.
    2. Goldberg, Michael D., 2000. "On empirical exchange rate models: what does a rejection of the symmetry restriction on short-run interest rates mean?," Journal of International Money and Finance, Elsevier, vol. 19(5), pages 673-688, October.
    3. Alba, Joseph D. & Papell, David H., 1998. "Exchange rate determination and inflation in Southeast Asian countries," Journal of Development Economics, Elsevier, vol. 55(2), pages 421-437, April.
    4. Beltrametti, Luca & Fiorentini, Riccardo & Marengo, Luigi & Tamborini, Roberto, 1997. "A learning-to-forecast experiment on the foreign exchange market with a classifier system," Journal of Economic Dynamics and Control, Elsevier, vol. 21(8-9), pages 1543-1575, June.
    5. repec:onb:oenbwp:y::i:50:b:1 is not listed on IDEAS
    6. Papell, David H., 1997. "Cointegration and exchange rate dynamics," Journal of International Money and Finance, Elsevier, vol. 16(3), pages 445-459, June.
    7. Goldberg, Michael D. & Frydman, Roman, 1996. "Empirical exchange rate models and shifts in the co-integrating vector," Structural Change and Economic Dynamics, Elsevier, vol. 7(1), pages 55-78, March.

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