Exchange rate economics is always and everywhere controversial

ABSTRACT

This article reviews the major developments in the recent literature on exchange rate economics. It is argued that the link between the exchange rate and economic fundamentals is breaking new ground. Evidence indicates that alternative analytical frameworks (such as the new open-economy macroeconomics) and exchange rate arrangements (such as the euro) have their theoretical and analytical elegance, but are proving empirically very difficult to implement. The role of methodological advances and alternative fundamental instruments (such as world commodity prices) is also highlighted.

KEYWORDS:

• Exchange rate volatility
• purchasing power parity
• monetary integration
• commodity prices

JEL CLASSIFICATION:

• F30
• F31
• F33 and F41

Acknowledgement

I am grateful to Mark P. Taylor for his guidance and constructive comment in writing this article. I am also grateful to Ken West for his helpful comments on an earlier draft and, to Muammer Wali for excellent research assistance.

Disclosure statement

No potential conflict of interest was reported by the author.