Bandwagon Effects or Rational Expectations in the Exchange Rate?

1993 ◽  
pp. 400-407
Author(s):  
Vasumathi Vijayraghavan
Keyword(s):  
Exchange Rate ◽  
Rational Expectations ◽  
The Exchange Rate ◽  
Bandwagon Effects

scholarly journals Can Information Heterogeneity Explain the Exchange Rate Determination Puzzle?

2006 ◽  
Vol 96 (3) ◽  
pp. 552-576 ◽  
Author(s):  
Philippe Bacchetta ◽  
Eric van Wincoop
Keyword(s):  
Exchange Rate ◽  
Empirical Evidence ◽  
Rational Expectations ◽  
Exchange Rate Volatility ◽  
Order Flow ◽  
Macroeconomic Variables ◽  
Symmetric Information ◽  
Macroeconomic Fundamentals ◽  
The Exchange Rate ◽  
Exchange Rate Changes

Empirical evidence shows that most exchange rate volatility at short to medium horizons is related to order flow and not to macroeconomic variables. We introduce symmetric information dispersion about future macroeconomic fundamentals in a dynamic rational expectations model in order to explain these stylized facts. Consistent with the evidence, the model implies that (a) observed fundamentals account for little of exchange rate volatility in the short to medium run, (b) over long horizons, the exchange rate is closely related to observed fundamentals, (c) exchange rate changes are a weak predictor of future fundamentals, and (d) the exchange rate is closely related to order flow.

scholarly journals Understanding Business Cycle Fluctuations in Pakistan

2020 ◽  
Vol 59 (1) ◽  
pp. 1-28
Author(s):  
Gulzar Khan ◽  
Ather Maqsood Ahmed
Keyword(s):  
Exchange Rate ◽  
Business Cycle ◽  
Open Economy ◽  
Rational Expectations ◽  
Forecast Error ◽  
Error Variance ◽  
New Keynesian ◽  
Impulse Response Functions ◽  
Business Cycle Fluctuations ◽  
The Exchange Rate

Notwithstanding the level of improvement in understanding the complexities of an economy, it is now well accepted that the ultimate incidence of various policy interventions leads to varied outcomes in terms of magnitude and persistence depending upon the structure of the economy. The objective of the present study is to disentangle the relative contributions of various exogenous and domestic shocks that contribute to business cycle fluctuations in Pakistan. The study is based on the New-Keynesian Open economy model, which is an extended version of (Gali & Monacili 2005). Keating’s two-step approach (1990, 2000) is employed to capture the dynamic behaviour of the variables of interest. Impulse response functions, along with forecast error variance decomposition analyses, are used to gain useful insights into the understanding of the transmission mechanism of policy and non-policy shocks. It is observed that fiscal policy does matter, at least in the short-run. The interest rate shock leads to the exchange rate appreciation thereby confirming the exchange rate puzzle. In response to adverse supply shocks, the Monetary Authority responds with a monetary contraction that prolongs the recessionary periods. Furthermore, it has a limited power to control inflation as inflation in Pakistan stems from supply-side factors as well as fiscal dominance. JEL Classification: C32, E52, E62, F41 Keywords: Open Economy, New Keynesian Model, Rational Expectations, Exchange Rate Puzzle

scholarly journals Stability, Wage Contracts, Rational Expectations, and Devaluations

1993 ◽  
Vol 32 (4II) ◽  
pp. 1005-1013
Author(s):  
Syed Zahid Ali
Keyword(s):  
Exchange Rate ◽  
Rational Expectations ◽  
Negative Impact ◽  
Real Income ◽  
The Other ◽  
Standard Result ◽  
The Real ◽  
Other Hand ◽  
The Exchange Rate ◽  
Home Goods

The effects of devaluations on economies have caused a great deal of concern in recent years. Conventional economists such as Robinson (1947) and Meade (1951) hold the view that due to high unemployment and the absence of any supplyside effects of the exchange rates, devaluation will increase employment if it increases the demand for home goods. A number of papers have been written which serioUsly challenge this result on a number of grounds. For example, Turnovsky (1981) has derived the result that if agents under-predict changes in the exchange rate then output will increase with devaluation. On the other hand, if agents over predict changes in the exchange rate then output will reduce with devaluation. However, economists such as Calvo (1983) and Larrian and Sachs (1986) have supported the standard result by arguing that the stability of the system is sufficient to rule out perverse outcomes of devaluation. Buffie (1986), on the other hand, has derived the result that for stable economies, devaluation mayor may not increase output. However, Buffie shows that if the production function is separable between primary factors and the imported input then devaluation will increase employment. Lai and Chang (1989) have derived the result that currency devaluation has a negative impact on output if workers are free from money illusion. Gylfason and Schmid (1983), report a similar result: if the real wage is assumed to be constant then devaluation contracts the real income.

scholarly journals The Impact of Anticipated and Unanticipated Exchange Rate Variability in Ukraine

2017 ◽  
pp. 33-46 ◽  
Author(s):  
Viktor Shevchuk
Keyword(s):  
Exchange Rate ◽  
Interest Rates ◽  
Rational Expectations ◽  
Aggregate Demand ◽  
Wholesale Price ◽  
Raw Material ◽  
Price Inflation ◽  
Exchange Rate Variability ◽  
The Exchange Rate ◽  
The Impact

This article studies the impact of the anticipated and unanticipated components of the nominal effective exchange rate on Ukraine’s main macroeconomic indicators. The study uses quarterly data from 1999 to 2016 and considers the relationship with the budget balance, incomes of trading partner countries, global interest rates, and global raw material prices. Using the time-varying coefficient model (the Kalman filter), the research shows that a depreciation of the hryvnia accelerates wholesale price inflation and negatively affects the performance of GDP and industrial output – these effects were clearly visible after the financial crisis of 2008-2009). However, the research found that only unanticipated changes in the exchange rate have an impact on agricultural production. The results are justified by means of a modified AD-AS model with rational expectations that accounts for the main mechanisms of the influence of the exchange rate on aggregate demand and supply amid a high level of dollarization in the economy.

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