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"The well-known uncovered interest parity puzzle arises from the empirical regularity that, among developed country pairs, the high interest rate country tends to have high expected returns on its short term assets. At the same time, another strand of the literature has documented that high real interest rate countries tend to have currencies that are strong in real terms - indeed, stronger than can be accounted for by the path of expected real interest differentials under uncovered interest parity. These two strands - one concerning short-run expected changes and the other concerning the level of the real exchange rate - have apparently contradictory implications for the relationship of the foreign exchange risk premium and interest-rate differentials. This paper documents the puzzle, and shows that existing models appear unable to account for both empirical findings. The features of a model that might reconcile the findings are discussed"--National Bureau of Economic Research web site

This paper empirically analyzes the impact of exchange-rate uncertainty, exchange-rate movements, and expectations on foreign direct investment (FDI). Using data on US outward FDI for the period 1984–2004 we examine two competing measures of exchange-rate volatility. While the standard measure yields a discouraging effect on FDI outflows in all industries the alternative risk specification reveals a clear distinction between manufacturing and non-manufacturing industries, with the latter showing a positive correlation with increased exchange risk. A real appreciation of host-country currency was associated with higher FDI flows, while expectations about an appreciation showed a negative result.

Cover -- Contents -- I. Introduction -- II. Theoretical background -- III. The Evolution of Exchange Rates in Fiji and Samoa -- IV. Measuring the Real Exchange Rates in Fiji and Samoa -- A. Conceptual Issues -- B. Alternative Aggregate Real Effective Exchange Rate Measures -- C. Bilateral Real Exchange Rate Measures -- V. Assessing Price Competitiveness at the Sectoral Level -- A. Measuring Fiji's and Samoa's Price Competitiveness in the Tourism Industry -- B. Estimating an Export Demand Function for Fiji's Tourism Industry -- C. Trade Balance Response to the Exchange Rate

AbstractFive real exchange rate indicators are computed to assess the international competitiveness of Hungarian industry. These indicators are explained in econometric equations by employment, unemployment, productivity, interest spread and real producer wage. Causality tests reveal that external performance has an impact on real exchange rates, and contributes to explaining real exchange rates. There is very limited scope for policy intervention to constrain the negative effects of capital inflows without incurring other costs.

The paper re-examines the determinants of the real exchange
rate equation, and suggests alternative determinants where appropriate,
as well as improvements in proxies from those conventionally used. The
paper emphasises the weaknesses of the multicountry approach to
empirical study of the real exchange rate. While real exchange rates are
determined for Pakistan, the terms-of-trade variable is found to be
insignificant. Excess demand for domestic credit, capital flow, and the
"opinions" variable are all found to be inversely related to the RER.
Thus government expenditure on non-tradable is positively related; and
better specification of the technological change variable shows support
for the balance effect.

Developing countries typically exhibit a high degree of macroeconomic variablesinstability. This feature is particularly evident as regards the volatility of the real exchange rate. The concern with these destabilizing effects generatedby real exchange rate instability has prompted some developing countries to adopt real exchange rate targeting since the late 60's. However, this policy produces an inflation bias. This paper reviews economic literature on theoretical frameworks and empirical evidences about effects of real exchange rate targeting.

This paper empirically assesses how democratization affects real exchange rates. By doing this, we combine so far separated strands of the economic literature and argue that democratization reduces currency undervaluation leading to a real exchange rate appreciation. We test this hypothesis empirically for a sample of countries observed from 1980 to 2007 by combining a difference-in-difference (DID) approach with propensity score matching (PSM) estimators. Our results reveal a strong and significant finding: democratization causes real exchange rates to appreciate. Consequently, the ongoing process of democratization observed in a few Arabic and Moslem countries is likely to reduce exchange rate distortions.