The Economics of Exchange
Rates
Lucio Sarno, Mark Taylor
In the last few decades
exchange rate economics has seen a number of developments, with substantial contributions
to both the theory and empirics of exchange rate determination. Important developments in
econometrics and the increasingly large availability of high-quality data have also been
responsible for stimulating the large amount of empirical work on exchange rates in this
period. Nonetheless, while our understanding of exchange rates has significantly improved,
a number of challenges and open questions remain in the exchange rate debate, enhanced by
events including the launch of the Euro and the large number of recent currency crises.
This volume provides a selective coverage of the literature on exchange rates, focusing on
developments from within the last fifteen years. Clear explanations of theories are
offered, alongside an appraisal of the literature and suggestions for further research and
analysis.
Reviews
'Sarno and Taylor's
book is a tour de force. The exposition is comprehensive, covering contributions from all
corners of the field, and covering the range from the seminal models of the 1970s to the
latest discoveries on the theoretical and econometric frontiers of the 2000s. There is no
excess verbiage or mathematics. Everything is there to serve a purpose. This is the
current state of knowledge.' Jeffrey A. Frankel, Harvard University
'This is a text around
which one can build a fine graduate-level course in international finance. The material in
this text fits the needs of scholars for a state-of-the-art coverage of the best thinking
on exchange rate economics. With topics like New open-economy macroeconomics and Official
intervention in the foreign exchange market it should be clear that this book is broad in
its scope and delves deeply into the area going well beyond the determinants of exchange
rates. The authors pay careful attention to pedagogy with patient, in-text explanations of
technical details like Ito's Lemma and excellent appendices on related issues, including
Jensen's inequality and GMM estimators. The patient and detailed explanations of
technical issues related to the core topics make the book self-contained. The authors have
been on the frontiers of research in this area, and this new text clearly reflects their
mastery of the subject. I highly recommend this text to both students and scholars of
international finance.' Michael Melvin, Arizona State University
'This is a superb
volume that should and will be featured on reading lists for years to come. It will also
be valued by market participants, policymakers, and their staffs. This is because the book
is very well written and brings a focus and organization to the subject that draws on the
decades of experience and contributions of the authors. I especially value the synthesis
of the empirical and theoretical literatures on exchange rate determination, market
efficiency, the new open economy macroeconomics as well as the up to date discussion on
the economics and econometrics of exchange rate forecastability. The Economics of Exchange
Rates is the first essential volume on this subject in a decade' Richard Clarida,
Columbia University, NBER and CEPR
'This book is a breath
of fresh air. It's current. It's comprehensive. It's going to be a delight to teach
from. I look forward to its success.' Richard Lyons, University of California,
Berkeley
'Sarno and Taylor
develop carefully all the exchange-rate research issues of the last 20 years - from
historical background through modern-methods applications up to empirical results. The
Economics of Exchange Rates will be indispensable on the bookshelves of academics and
international policymakers.' Robert P Flood, Editor, IMF Staff Papers
Contents
1. Introduction;
2. Foreign exchange market
efficiency;
3. Purchasing power parity
and the real exchange rate;
4. Exchange rate
determination: theories and evidence;
5. New open economy
macroeconomics;
6. Currency unions, pegged
exchange rates, and target zone models;
7. Official intervention in
the foreign exchange market;
8. Models of currency crisis
and speculative attack;
9. Foreign exchange mark
320 pages