The Monetary Models of Exchange-rate Determination

  • Keith Pilbeam
Part of the Macmillan Texts in Economics book series (TE)


The purchasing power parity theory outlined in Chapter 6 is far from a satisfactory explanation of observed exchange-rate behaviour. In particular, it is very much concerned with goods arbitrage and has nothing to say about capital movements internationally. During the post-Second World War era there has been an enormous growth of capital and money markets meaning that it is possible for international investors to switch huge amounts of money out of one currency into another very speedily. This being the case, speculators will tend to move their money between currencies based on the expected rate of return of being in one currency compared to another. What people expect to happen to the exchange rate will play a crucial part in determining which currencies to buy and sell — if a currency is expected to depreciate then agents will tend to switch out of that currency into currencies that they expect to appreciate. In this chapter, we look at some more recent and sophisticated exchange-rate models that have been developed in an attempt to model exchange-rate behaviour more successfully.


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Selected Further Readings

  1. Bilson, J.F. O. (1978a) ‘Rational Expectations and the Exchange Rate’, in J. A. Frenkel and H. G. Johnson (eds), The Economics of Exchange Rates (Reading: Addison-Wesley).Google Scholar
  2. Bilson, J. F. O. (1978b) ‘The Monetary Approach to the Exchange Rate: Some Empirical Evidence’, IMF Staff Papers, vol. 25, pp. 48–75.CrossRefGoogle Scholar
  3. Bilson, J. F. O. (1979) ‘Recent Developments in Monetary Models of Exchange Rate Determination’, IMF Staff Papers, vol. 26, pp. 201–23.CrossRefGoogle Scholar
  4. Dornbusch, R. (1976a) ‘Expectations and Exchange Rate Dynamics’, Journal of Political Economy, vol. 84, pp. 1161–76.CrossRefGoogle Scholar
  5. Dornbusch, R. (1976b) ‘The Theory of Flexible Exchange Rate Regimes and Macroeconomic Policy’, Scandinavian Journal of Economics, vol. 84, pp. 255–75.CrossRefGoogle Scholar
  6. Dornbusch, R. (1983) ‘Flexible Exchange Rates and Interdependence’, IMF Staff Papers, vol. 20, pp. 3–30.CrossRefGoogle Scholar
  7. Frankel, J. A. (1979) ‘On the Mark: a Theory of Floating Exchange Rates Based on Real Interest Rate Differentials’, American Economic Review, vol. 69, pp. 610–22.Google Scholar
  8. Frenkel, J. A. (1976) ‘A Monetary Approach to the Exchange Rate: Doctrinal Aspects and Empirical Evidence’, Scandinavian Journal of Economics, vol. 78, pp. 169–91.CrossRefGoogle Scholar
  9. Frenkel, J. A. and Johnson, H. G. (eds) (1976) The Monetary Approach to the Balance of Payments (London: Allen & Unwin).Google Scholar
  10. Isard, P. (1978) ‘Exchange Rate Determination: a Survey of Popular Views and Recent Models’, Princeton Studies in International Finance, no. 42.Google Scholar
  11. MacDonald, R. and Taylor, M. P. (1989) ‘Economic Analysis of Foreign Exchange Markets: an Expository Survey’, in R. MacDonald and M.P. Taylor (eds), Innovations in Open Economy Macroeconomics (Oxford: Basil Blackwell).Google Scholar
  12. Mussa, M. (1976) ‘The Exchange Rate, the Balance of Payments, and Monetary and Fiscal Policy Under a Regime of Controlled Floating’, Scandinavian Journal of Economics, vol. 78, pp. 229–48.CrossRefGoogle Scholar

Copyright information

© Keith Pilbeam 1998

Authors and Affiliations

  • Keith Pilbeam
    • 1
  1. 1.City UniversityLondonUK

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