Interest Rates, Exchange Rates and World Monetary Policy
A careful basic theoretical and econometric analysis of the factors determining the real exchange rates of Canada, the U.K., Japan, France and Germany with respect to the United States is conducted. The resulting conclusion is that real exchange rates are
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Interest Rates, Exchange Rates and World Monetary Policy 123
Interest Rates, Exchange Rates and World Monetary Policy
John E. Floyd
Interest Rates, Exchange Rates and World Monetary Policy
Prof. John E. Floyd Department of Economics University of Toronto 150 St. George Street Toronto, ON M5S 3G7 Canada [email protected]
ISBN 978-3-642-10279-0 e-ISBN 978-3-642-10280-6 DOI 10.1007/978-3-642-10280-6 Springer Heidelberg Dordrecht London New York Library of Congress Control Number: 2009941852 © Springer-Verlag Berlin Heidelberg 2010 This work is subject to copyright. All rights are reserved, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilm or in any other way, and storage in data banks. Duplication of this publication or parts thereof is permitted only under the provisions of the German Copyright Law of September 9, 1965, in its current version, and permission for use must always be obtained from Springer. Violations are liable to prosecution under the German Copyright Law. The use of general descriptive names, registered names, trademarks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. Cover design: WMXDesign GmbH, Heidelberg, Germany Printed on acid-free paper Springer is part of Springer Science+Business Media (www.springer.com)
To Juney with Love
Preface
This book is the result of many years of thinking about international monetary economics. I must thank my long-time colleague Allan Hynes for ongoing discussions of the issues analysed here as well as for important comments on the organization and presentation of the material. I also want to thank Kit Pasula for reading through the manuscript and finding many typos and points needing clarification. Colleagues Gordon Anderson and John Maheu must be gratefully acknowledged for helping me learn about and deal with the econometric issues involved. Angelo Melino deserves similar gratitude with regard to both economics and econometrics, as does Alex Maynard for our many discussions about the forward premium puzzle and for helping me obtain data. Special thanks go to Alice Blanck and Niels Peter Thomas of Springer-Verlag in Heidelberg, Germany for their editorial assistance and encouragement. Finally, this book could not have been completed were it not for my wife, June, putting up with my almost constant preoccupation with thinking about economics.
University of Toronto, June 2009
John Floyd Professor of Economics
Contents
1
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
Part I A Theoretical Framework 2
Specifications and Assumptions . . . . . . . . . . . . . . . . . . . . . . 11
3
Underlying Equilibrium Growth Paths . . . . . . . . . . . . . . . 3.1 Aggregate Production and Income . . . . . . . . . . . . . . .
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