Exchange Rate Volatility, Trade, and Capital Flows under Alternative Exchange Rate Regimes

Download or read book Exchange Rate Volatility, Trade, and Capital Flows under Alternative Exchange Rate Regimes written by Piet Sercu and published by Cambridge University Press. This book was released on 2006-12-14 with total page 176 pages. Available in PDF, EPUB and Kindle. Book excerpt: Recent years have seen a substantial increase in the volatility of exchange rates. This trend has prompted economists and finance analysts to question if the observed behavior of exchange rates is consistent with a rational model. Does that volatility, further, hinder trade? Professors Sercu and Uppal examine these issues in the context of dynamic general equilibrium models, explicitly considering the role of financial markets while allowing for commodity markets to be segmented across countries. They show that the implications of the theoretical model for exchange rates in this context are quite different from those put forth by monetary theorists and proponents of purchasing power parity arguments.