Nominal Exchange Rates
The nominal exchange rate is the rate at which the currency of one country can be exchanged for that of another. The overall value of a currency can be summarized through the ‘effective nominal exchange rate’, which is a weighted average of a country’s nominal bilateral exchange rates. Following the advent of freely floating exchange rates in 1973 there has been intense research on understanding the mechanisms of nominal exchange rate determination and the search for an adequate model, but no model has so far withstood rigorous empirical tests.
KeywordsBretton Woods system Bubbles Cointegration Currency crises Euro European Monetary System Exchange rate determination Exchange rate target zones Exchange rate volatility Fixed exchange rates Floating exchange rates Forward premium anomaly GARCH models Law of one price Monetary transmission mechanism Money supply Nominal exchange rate determination Nominal exchange rates Nominal interest rates Open market operations Overshooting Peso problem Purchasing power parity Rational expectations Real balances Real exchange rates Real interest differential Realized volatility Risk premium Specification problems in econometrics Spot exchange rates Sterilized intervention Transversality condition Uncovered interest parity
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