Resolving the enigma of foreign exchange rate fluctuations

Mr Masanaga Kumakura (PhD student, Economics, Dawrin College)

Saturday, 23 January, 1999; 7:00-9:00pm

Seminar room, Darwin College

There is one thing about exchange rates that no Japanese studying overseas fails to notice: they fluctuate wildly. The yen-pound exchange rate, for example, had fallen sharply from 280 yen per pound of 1990 to 135 yen in April 1995, only to climb up again to 220 yen by the middle of last year. Furthermore, the rate has seen a number of shorter-term gyrations during this same period, often rising or falling by more than 10 per cent in a mere few months or even weeks.
Why exchange rates fluctuate so wildly? Who and what economic forces, in any, are underlying their movements? Are exchange rates gyrations of this magnitude not injurious to the workings of our economy? And, is it by any chance possible to predict future exchange rates?
Unfortunately, a full account of these seemingly simple questions is beyond the reach of present-day economics. Economic theories of exchange rates, however, are not totally useless but they in fact can be surprisingly useful in dispelling various unnecessary enigmas about exchange rates. In this presentation, I will discuss, in particular, the following three topics:

basic ideas and concepts indispensable for discussing any currency-related matter; some topical issues related to exchange rates, including recurrent "endaka" in the 1980-90s, the recent Asian currency crisis and the upcoming introduction of the single-currency Euro in some parts of Europe; exchange rates in modern macro-economic and their usefulness and limitations.