International Trade and Finance: A North American Perspective

By Khosrow Fatemi | Go to book overview

FREXCH = 51.124836 + .045763*DOD of PRIV - 1.711899*MS
(*Sig T = .0001, .0369)
R2 = .99


SUMMARY AND CONCLUSION

It seems from the preliminary results of our study that both of our hypotheses have validity. For all the major debtor countries debt flows of one kind or another are major determinants of the free market exchange rate. In most cases, the same is true for the official exchange rates. For the oil-exporting countries among the major debtor nations, either the changes in the money supply or the consumer price index act as additional determinants of exchange rate variability. For the relatively developed countries of Argentina, Brazil, Korea, and Turkey, the short-term interest rate is also a key determinant of the exchange rate.


NOTES
1.
Rudiger Dornbusch, "Expectations and Exchange Rate Dynamics," Journal of Political Economy 84 ( December 1976): 1161-76.
2.
Jeffrey A. Frankel, "On the Mark: A Theory of Floating Exchange Rates Based on Real Interest Differentials," American Economic Review 69, no. 4 ( September 1979): 610-22.
3.
William H. Branson, "Macroeconomic Determinants of Real Exchange Risk," Managing Foreign Exchange Risk, edited by R. J. Herring ( Cambridge: Cambridge University Press, 1983).
4.
Rudiger Dornbusch, "Flexible Exchange Rates and Interdependence," International Monetary Fund Staff Papers 30, no. 1 ( March 1983): 3-30.
5.
Mohsin S. Khan, and M. C. Knight, "Determinants of Current Account Balances of Non-oil Developing Countries in the 1970s: An Empirical Analysis," International Monetary Fund Staff Papers 30, no. 4 ( December 1983): 819-42.
6.
Mohsin S. Khan, "Developing Country Exchange Rate Policy Responses to Exogenous Shocks," American Economic Review 76, no. 2 ( May 1986): 84-87.
7.
See, for example, Rudiger Dornbusch, "External Debt, Budget Deficits, and Disequilibrium Exchange Rates," in International Debt and the Developing Countries, edited by G. W. Smith and J. T. Cuddington ( Washington, D.C.: World Bank, 1985); Liaquat Ahmed, "Stabilization Policies in Developing Countries," World Bank Research Observer 1, no. 1 ( January 1986): 79-110; Russel G. Kincaid, "A Test of the Efficacy of Exchange Rate Adjustments in Indonesia," International Monetary Fund Staff Papers 31, no. 1 ( March 1984): 62-92; Sebastian Edwards, "Sequencing Economic Liberalization in Developing Countries," Finance & Development 24, no. 1 ( March 1987): 26-29; Michael Mussa, "Macroeconomic Policy and Trade Liberalization: Some Guidelines," World Bank Research Observer 2, no. 1 ( January 1987): 61-77.
8.
The choice of the period is partly based on the desire to have at least five to six years of data prior to the commencement of the freely floating exchange rate in

-54-

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