This four-chapter overview of basic exchange rate theories discusses (i) the elasticity and absorption approach, (ii) the (long-run) implications of the monetary approach, (iii) the short-run effects of monetary and fiscal policy under various economic conditions, and (iv) the transition from short-run to long-run in a sticky-price model with rational expectations. We provide ample anecdotal, historical, and heuristic information on the goodness-of-fit of the various exchange rate models based on simple graphs, statistics, and tests. Details are provided in technical notes.

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Keywords absorption, elasticity, exchange rates, expectations, fiscal policy, monetary approach, monetary policy, overshooting
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van Marrewijk, J.G.M.. (2005). Basic Exchange Rate Theories (No. TI 05-024/2). Retrieved from