The three chapters of this thesis address two questions. First, how are real and nominal exchange
rates between different national currencies determined? Second, how does this determination influ-
ence the international transmission of macroeconomic fluctuations and, especially, monetary policy
disturbances?
Chapter 1 comprises an empirical evaluation of long-run purchasing power parity as a theory of
equilibrium nominal exchange rate determination for the post-Bretton Woods data. Structural time
series methods are used to identify bivariate moving average representations of nominal exchange
rates and relative goods prices and to test whether these empirical representations are consistent
with the implications of purchasing power parity. Long-run purchasing power parity can be un
ambiguously rejected for the G- 7 countries. There are permanent deviations from parity which
account for almost all of the variance of real exchange rates, and which are driven by permanent
disturbances to nominal rates which are never reflected in relative goods prices.
Chapter 2 presents an empirical evaluation of the hypothesis that the global Depression of the
1930’s was attributable to international transmission of (idiosyncratic) U.S. monetary policy actions
through the International Gold Exchange Standard - fixed exchange rate - regime. Specifically, the
analysis evaluates whether the interwar output collapse in Canada was caused by transmitted U.S.
monetary policy disturbances. A multivariate structural time series representation of the Cana
dian macroeconomy is estimated which is consistent with the dynamic and long-run equilibrium
properties of a Mundell- Fleming small open economy model and in which U.S. data represent the
‘rest of the world’. The empirical results show that U.S. monetary disturbances play a negligible
role for both Canadian and U.S. output movements in the 1930’s. Permanent common real shocks
to outputs can account for the onset, depth and duration of the Depression in both economies.
There is little evidence to support a Gold-Standard transmitted global output collapse through the
transmission mechanisms usually associated with purchasing power parity theories of real exchange
rate determination.
Chapter 3 develops an alternative theory of real and nominal exchange rate determination and
of the international transmision mechanism which can account for many stylized facts regarding
the empirical behaviour of real and nominal exchange rates that long-run purchasing power parity
fails to explain. In a two-country, two-currency overlapping generations model, the role of optimal
portfolio choices between internationally traded assets is emphasized - rather than goods market
trade - as the source of currency demands. These demands, and supplied of assets generated by
domestic monetary policies, determine both real and nominal exchange rates. Here, monetary policy changes can induce permanent international and intra-national reallocations through real
exchange rate and real interest rate adjustments. This transmission mechanism differs markedly
from that implied by purchasing power parity.
| Identifer | oai:union.ndltd.org:LACETR/oai:collectionscanada.gc.ca:BVAU.2429/6977 |
| Date | 05 1900 |
| Creators | Betts, Caroline M. |
| Source Sets | Library and Archives Canada ETDs Repository / Centre d'archives des thèses électroniques de Bibliothèque et Archives Canada |
| Language | English |
| Detected Language | English |
| Type | Electronic Thesis or Dissertation |
| Relation | UBC Retrospective Theses Digitization Project [http://www.library.ubc.ca/archives/retro_theses/] |
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