Basic Exchange Rate Theories
February 2005
Research Paper
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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.
Keywords
- exchange rates
- monetary policy
- fiscal policy
- expectations
- elasticity
- absorption
- monetary approach
- overshooting
Classifications using
Journal of Economic Literature (JEL) Classification System
Automatically Extracted Terms
- exchange
- exchange rate
- price
- equilibrium
- exchange rates
- charles van marrewijk
- money
- figure
- exchange rate theories
- level
- interest rate
- equation
- theory
- expectation
- country
- policy
- marrewijk
- interest
- charle
- change
