Williamson (2008): Exchange Rate Economics

Williamson, John (2008): Exchange Rate Economics. Peterson Institute for International Economics, Working Papers No. 08-3.

In his latest working paper, John Williamson summarizes the current theory of how a floating exchange rate is determined, dividing the subject into what determines the steady state and what determines the transition to steady state. He examines the inadequacies of this model, and an alternative "behavioral" model, which recognizes that the foreign exchange market is populated by both fundamentalists and chartists, is presented.

Williamson argues that the main importance of understanding the foreign exchange market for development strategy is to permit a correct appraisal of the dangers of Dutch disease. Empirically it seems that from the standpoint of promoting development it is preferable to have a mildly undervalued rate. Williamson concludes the working paper by examining implications for exchange rate regimes.

Download: http://www.petersoninstitute.org/publications/wp/wp08-3.pdf