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Destabilizing Exchange Rate Speculation: A Counterexample to Milton Friedman
University of Wisconsin-Madison.
1992 (English)Report (Other academic)
Abstract [en]

This paper constructs a counterexample to Milton Friedman's assertion that profitable speculation must stabilize the exchange rate. It is shown that in the case of persistent shocks to monetary growth rates, currency speculators increase exchange rate volatility by buying "strong" currencies and selling "weak" currencies. On the other hand, Friedman's claim is supported in another example with transient monetary shocks. The exchange rate is then stabilized when speculators buy temporarily "weak" currencies in anticipation of their future appreciation.

Place, publisher, year, edition, pages
Stockholm: IIES , 1992. , 17 p.
Seminar Paper / Institute for International Economic Studies, Stockholm University, ISSN 0347-8769 ; 525
National Category
URN: urn:nbn:se:su:diva-41843OAI: diva2:337944
Published in connection with a visit at the IIES.Available from: 2010-08-10 Created: 2010-08-10 Last updated: 2010-08-10

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