The identification of destabilizing foreign exchange speculation |
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Authors: | Steven W Kohlhagen |
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Institution: | University of California at Berkeley, Berkeley, CA 94720, USA |
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Abstract: | This paper develops a technique for directly identifying destabilizing speculation. It shows that previous techniques that have been used in the empirical foreign exchange market literature cannot correctly identify whether or not destabilizing speculation has occurred. It is shown that the ‘true’ underlying model that determines the exchange rate (or any price) must be known before the stability of speculation can be determined empirically. Two appendices are included that (a) present an example of a correct empirical test for the 1973–1975 foreign exchange markets, and (b) show how a rational expectations framework could be used to analyze the question. |
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