Abstract
Much innovation in the financial field has been based on the revolution in information and communications technology. One of the most dramatic developments has been the globalisation of securities markets, which happened very suddenly.
The author is in the debt of Alec Chrystal and Geoffrey Wood for helpful comments and discussion; any errors, of course, remain the author’s.
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Notes and References
For further discussion see W.M. Corden (1985) Inflation, Exchange Rates and the World Economy: Lectures on International Monetary Economics, 3rd ed. (Oxford: Clarendon Press).
Modern exchange rate theory starts from the proposition that exchange rates are determined in asset markets. See, for example, R. MacDonald (1988) Floating Exchange Rates: Theories amp; Evidence (London: Unwin Hyman).
D. Begg (1989) ‘Floating Exchange Rates in Theory and Practice’, Oxford Review of Economic Policy, 5, no. 3, Autumn, pp. 24–39.
For an analysis of the wealth effects associated with cumulative current account imbalances see R. Dornbusch and S. Fischer (1980) ‘Exchange rates and the Current Account’, American Economic Review, 70, no. 5, December, pp. 960–71.
A possible mechanism for this is suggested by McKinnon: R.I. McKinnon (1982) ‘Currency Substitution and Instability in the World Dollar Market’, American Economic Review, 72, no. 3, June, pp. 320–33.
For further discussion see D.V. Coes (1987) ‘Exchange Rate Intervention and Imperfect Capital Mobility’ in D.R. Hodgman and G.E. Wood (eds.), Monetary and Exchange Rate Policy (London: Macmillan).
See K.A. Chrystal and G.E. Wood (1988) ‘Are Trade Deficits a Problem?’, Federal Reserve Bank of St. Louis Review, 70, no. 1, Jan/Feb, pp. 3–11.
This fact is central to the entire class of ‘overshooting’ models. See R. Dornbusch (1976) ‘Expectations and Exchange Rate Dynamics’, Journal of Political Economy, 84, no. 6, December, pp. 1161–76.
P.R. Krugman (1989) Exchange Rate Instability (Cambridge, Mass: MIT Press).
Empirically the nominal rate and inflation expectations effects can be separated; see J.A. Frenkel (1979) ‘On the Mark: A Theory of Floating Exchange Rates Based on Real Interest Differentials’, American Economic Review, 69, no. 4, September, pp. 610–27.
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© 1992 Stephen F. Frowen and Dietmar Kath
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Pepper, G.T. (1992). Capital Flows and Exchange Rates: Some Implications. In: Frowen, S.F., Kath, D. (eds) Monetary Policy and Financial Innovations in Five Industrial Countries. Palgrave Macmillan, London. https://doi.org/10.1007/978-1-349-21684-0_8
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DOI: https://doi.org/10.1007/978-1-349-21684-0_8
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