multilateral exchange rate determination a strongmodelstrong for the.pdfVIP

This PDF is a selection from an out-of-print volume from the National Bureau of Economic Research Volume Title: Exchange Rate Theory and Practice Volume Author/Editor: John F. O. Bilson and Richard C. Marston, eds. Volume Publisher: University of Chicago Press Volume ISBN: 0-226-05096-3 Volume URL: /books/bils84-1 Publication Date: 1984 Chapter Title: Multilateral Exchange Rate Determination: A Model for the Analysis of the European Monetary System Chapter Author: Giorgio Basevi, Michele Calzolari Chapter URL: /chapters/c6845 Chapter pages in book: (p. 443 - 466) 13 Multilateral Exchange Rate Determination: A Model for the Analysis of the European Monetary System Giorgio Basevi and Michele Calzolari 13.1 Introduction The purpose of this paper is to build a theoretical framework that will be as simple aspossible and yet adequate for econometric estimation and policy analysis of the process of exchangerate determination in a multicountry and multicurrency world. By using a popular model of exchange rates-ex- tended by Frankel (1979) on the basis of an earlier version proposed by Dornbusch (1976)-we also hope to lay the ground for more satisfactory tests of its theoretical foundations. We do this, first, by making the model multilateral-until now it has been cast in a two-country world-and sec- ond, by analyzing rationally formed expectations about future exchange rates on the basis of the model’s structural version rather than the reduced- form version used by previous commentators. ’ Our treatment of rational expectations is, however, limited to the extent that we have not assumed rationally expected processes for the exogenous variables. Thus we cannotpresent in this paper the analysis of the effects of policy changes and of other exogenous shocks. The characterizing feature of this stage of our research is