Exchange Rates, Prices, and World Trade: New Methods, Evidence, and Implications

Exchange Rates, Prices, and World Trade: New Methods, Evidence, and Implications

Exchange Rates, Prices, and World Trade: New Methods, Evidence, and Implications

Exchange Rates, Prices, and World Trade: New Methods, Evidence, and Implications

Synopsis

In recent years, exchange rates, prices, and world trade have taken on a new significance and are now among the most widely debated issues in economics. Exchange Rates, Prices and World Tradeoffers a simple yet sophisticated analytical approach to deal with the most controversial issues in exchange rate economies. Meher Manzur provides a systematic treatment of the interaction between national price levels and exchange rates, the formation of expectations regarding exchange rates, and the effects of real exchange rate changes on trade flows. Drawing from the most current information, he provides a new methodology for the listing of purchasing power parity and an original approach to the measurement of variation in the structure of relative prices and use of new measures in econometric work. He also presents a model to link the patterns of world trade to variations in relative prices and examines modern issues related to the characteristics of foreign exchange markets. Exchange Rates, Prices and World Tradeprovides strong analytical frameworks and empirical results which will be of great use to researchers, policy makers, and those studying finance.

Excerpt

The volatility and unpredictability of exchange rates and the effects of flexible exchange rates on inflation are among the most controversial issues in international monetary economics. These issues raise questions about the degree to which domestic inflationary propensities and their transmission across countries are conditioned by the nature of the exchange rate regime. These questions themselves concern the more fundamental problems of exchange rate determination and price formation in open economies, and the degree of monetary independence and its implications for macroeconomic policy.

This book provides a systematic treatment of the interaction between national price levels and exchange rates; the formation of expectations regarding exchange rates; and the effects of real exchange rate changes on trade flows. The study is made up of five self-contained chapters with a common theme—the behaviour of prices and quantities in international goods and financial markets.

Chapter 1 starts with a description of the experience with exchange rates over the last three decades. Then follows a discussion on recent interest in greater fixity of exchange rates. Subsequent sections of Chapter 1 survey the literature on purchasing power parity, asset market aspects of exchange rates and the role of exchange rates in determining world trade patterns. The chapter concludes with an overview of the chapters which follow. The whole book is written so that specialists in international monetary economics can skip this chapter without loss of continuity.

The relationship between exchange rates and prices that is depicted by the purchasing power parity (PPP) hypothesis is one of the oldest and most controversial in the theory of exchange rate determination. Chapter 2 introduces a new methodology to test PPP for all major countries simultaneously. This new approach, which is an extension of Divisia index number theory, is implemented with data from the

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