Discipline: Business and Economics
In the past few years exchange rates have attained great prominence in economic and policy discussion in industrialized and developing countries. Issues include, first, whether or not a floating foreign exchange market-where governments do not systematically target exchange rates--is "efficient." Because many economists believe that exchange risk can be effectively hedged in forward markets, they argue that international monetary reform is unnecessary. Second, after a decade and a half of unremitting turbulence in the foreign exchange markets, economists cannot agree on "equilibrium" or desirable official targets for exchange rates if they were to be stabilized. Two separate and contending principles—purchasing power parity and balance of trade-yield very different estimates for the "correct'' . yen/dollar and mark/dollar exchange rates (McKinon 1988). Third, by what working rule should the dynamics of the exchange rates be anchored to determine whether the domestic official exchange rate is overvalued or undervalued, with respect to the external exchange rate in the developing countries, particularly the Third World.