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A Model of Foreign Exchange Rate Indetermination

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  • Charles Engel

Abstract

Economic agents undertake actions to protect themselves from the short-run impact of foreign exchange rate fluctuations: Nominal goods prices are set in consumers' currencies, and firms hedge foreign exchange risk. A model is presented here which shows that these features of the economy can lead to indeterminacy in the nominal exchange rate in the short run. There can be noise in the exchange rate, unrelated to any fundamentals, essentially because the short-run fluctuations do not influence any rational agent's behavior. Empirical implications of this sort of noise are explored.

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  • Charles Engel, 1996. "A Model of Foreign Exchange Rate Indetermination," NBER Working Papers 5766, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:5766
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    Cited by:

    1. Maurice Obstfeld & Kenneth Rogoff, 2001. "The Six Major Puzzles in International Macroeconomics: Is There a Common Cause?," NBER Chapters, in: NBER Macroeconomics Annual 2000, Volume 15, pages 339-412, National Bureau of Economic Research, Inc.
    2. Philippe Bacchetta & Eric van Wincoop, 1998. "Does Exchange Rate Stability Increase Trade and Capital Flows?," Working Papers 98.04, Swiss National Bank, Study Center Gerzensee.
    3. Michael B. Devereux & Charles Engel, 2001. "The Optimal Choice of Exchange Rate Regime: Price-Setting Rules and Internationalized Production," NBER Chapters, in: Topics in Empirical International Economics: A Festschrift in Honor of Robert E. Lipsey, pages 163-194, National Bureau of Economic Research, Inc.
    4. Michael B. Devereux & Charles Engel, 1998. "Fixed vs. Floating Exchange Rates: How Price Setting Affects the Optimal Choice of Exchange-Rate Regime," NBER Working Papers 6867, National Bureau of Economic Research, Inc.

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    • F40 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - General

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