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What Determines the Nominal Exchange Rate? Some Cross-Sectional Evidence

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  • Philip Lane
Abstract
This paper examines the determination of long-run movements in nominal exchange rates across countries. We model the long-run movement in the nominal exchange rate as depending on (i) the long-run inflation differential; and (ii) the long-run change in the real exchange rate. We argue that the former depends on country characteristics such as openness, country size, the level of outstanding government debt and central bank independence and the latter on the rate of economic growth and the terms of trade. Empirical support for both channels is provided, suggesting the fruitfulness for the analysis of exchange rates of studying cross-sectional cross-country data.

Suggested Citation

  • Philip Lane, 1998. "What Determines the Nominal Exchange Rate? Some Cross-Sectional Evidence," Economics Technical Papers 9812, Trinity College Dublin, Department of Economics.
    • Handle: RePEc:tcd:tcduet:9812
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    File URL: http://www.tcd.ie/Economics/TEP/1998/9812.pdf
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    References listed on IDEAS

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    Cited by:

    1. Patrick Honohan & Philip R. Lane, 1999. "Pegging to the Dollar and the Euro," International Finance, Wiley Blackwell, vol. 2(3), pages 379-410, November.
    2. Lane, Philip R., 2001. "The new open economy macroeconomics: a survey," Journal of International Economics, Elsevier, vol. 54(2), pages 235-266, August.
    3. Nektarios A. Michail, 2021. "The impact of conflict on the exchange rate of developing economies," Review of Development Economics, Wiley Blackwell, vol. 25(2), pages 916-930, May.
    4. Oliinyk Oksana & Ksendzuk Valentyna & Sergiienko Larysa & Lehan Iryna, 2020. "Research Of Functional Changes In Foreign Exchange Rate EUR/UAH Under Conditions Of Economic Transformation In Ukraine," Bulletin of Geography. Socio-economic Series, Sciendo, vol. 48(48), pages 141-154, June.
    5. Richard Clay Barnett, 2003. "Smuggling, non‐fundamental uncertainty, and parallel market exchange rate volatility," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 36(3), pages 701-727, August.
    6. Dungey, Mardi, 2004. "Identifying terms of trade effects in real exchange rate movements: evidence from Asia," Journal of Asian Economics, Elsevier, vol. 15(2), pages 217-235, April.
    7. Hermann Sintim-Aboagye & Chandana Chakraborty & Serapio Byekwaso, 2017. "Foreign Capital Flows, Uncertainties of Exchange Rates and Central Bank Independence: Implications for Emerging Economies," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 45(4), pages 485-496, December.
    8. Zhang, Fan & Pan, Zuohong, 2004. "Determination of China's long-run nominal exchange rate and official intervention," China Economic Review, Elsevier, vol. 15(3), pages 360-365.
    9. Nikolaos Antonakakis & Ioannis Chatziantoniou & David Gabauer, 2021. "The impact of Euro through time: Exchange rate dynamics under different regimes," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(1), pages 1375-1408, January.

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    More about this item

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F40 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - General

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