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

Description

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 behaviour of exchange rates is consistent with a rational model. Does that volatility hinder trade? What are financial markets' effects on countries' investment decisions, and how would changes in fixed exchange rates affect growth and welfare? What are the requirements to make such changes feasible? 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 theoretical models for exchange rates in this context are quite different from those put forth by monetary theorists and proponents of purchasing power parity arguments.

'Sercu and Uppal understand that goods markets and financial markets are not yet truly globalized. This book is a nice synthesis of research on the effects of barriers to trade on exchange rates, trade volume and financial flows. It is technically solid, but the style is lucid and the authors provide a great deal of intuition.' Charles M. Engel, University of Washington 'In this book Piet Sercu and Raman Uppal provide us with a deep and rigorous analysis of the workings of the international financial system. For the reader willing to make the intellectual journey with the authors, reading this book is a rewarding experience.' Paul de Grauwe, University of Leuven, Belgium 'This important book makes significant contributions that extend the frontier of research on international macroeconomics and finance. It foreshadows future progress in the economics of exchange rates, and will be required reading for my graduate students, as it should for all researchers in the field. This book contains a rare combination of literature survey, theory, evidence, policy implications, and (most importantly) perspective and judgement, which truly deserves the appellation of the 'new open-economy macroeconomics'.' Alan Stockman, University of Rochester 'Explaining the volatility of nominal and real exchange rates is at the heart of international macroeconomics. Sercu and Uppal have done a great job of expositing some of the frontier work in this area. They build intuition with simple models and then deftly analyze the empirical implications. This book is a must read for all economists interested in exchange rates.' Patrick Kehoe, Federal Reserve Bank of Minneapolis