Exchange Rate Economics

27 Pages Posted: 9 Feb 2008 Last revised: 3 Dec 2010

See all articles by John Williamson

John Williamson

affiliation not provided to SSRN

Date Written: February 1, 2008


The paper summarizes the current theory of how a floating exchange rate is determined, dividing the subject into what determines the steady state and what determines the transition to steady state. The inadequacies of this model are examined, and an alternative "behavioral" model, which recognizes that the foreign exchange market is populated by both fundamentalists and chartists is presented. It is argued that the main importance of understanding the foreign exchange market for development strategy is to permit a correct appraisal of the dangers of Dutch disease. Empirically it seems that from the standpoint of promoting development it is preferable to have a mildly undervalued rate. The paper concludes by examining implications for exchange rate regimes.

Keywords: exchange rates, behavioral model, Dutch disease

JEL Classification: F31, F43, O24

Suggested Citation

Williamson, John, Exchange Rate Economics (February 1, 2008). Peterson Institute for International Economics Working Paper No. 08-3, Available at SSRN: or

John Williamson (Contact Author)

affiliation not provided to SSRN ( email )

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