Kenneth Rogoff: evaluation

Transcript context

…Feel free to give a wonky answer to this one. Why do you think it’s been so hard for economics to develop a satisfactory theory of exchange rates? Purchasing power parity seems to hold only within very broad bands, something like 2x, and the rest just seems very murky. Why is that so difficult? Part of that is if you have floating exchange rates. There’re a lot of financial factors that are hard to understand that move it around a lot. We’re not able to easily identify those factors, but I think, more and more, theory, empirics is coalesced around things like bank balance sheets. Can banks arbitrage exchange rates and various pricing imperfections? I think the way to research the past 10 or 15 years has been that the exchange rate moves a lot but it’s not suddenly moving around the economy with it. We thought that for a long time, but I think the general view today — it isn’t always true — but that a lot of the movements have to do with financial frictions and financial factors, not some gnomes controlling the exchange rate, that there’s a lot of random noise. Do you think we need a good theory of both real and nominal exchange rates to make reliable policy recommendations? If we don’t really know what the exchange rate will be doing and why, doesn’t that put us in the slightly odd position that we’re saying do this, do that, but the most fundamental price variable is a mystery to us?…

Stored transcript either side of the excerpt. The highlighted words are the published quote; the surrounding text is unedited source, never generated.