Report Number

1997-005

Abstract

This paper suggests a structural connection between rational speculative activity and exchange rate volatility. We note that, when Friedman originally claimed that rational speculators must smooth exchange rate, he excluded interest rate differentials form his interpretation of speculator behavior. If interest rates matter, rational speculators could sometimes violate Friedman's description, and buy a currency whose value is relatively high or sell a currency whose value is low.

Keywords

Exchange Rate

Date of this Version

1997

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