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.

absorption, elasticity, exchange rates, expectations, fiscal policy, monetary approach, monetary policy, overshooting
Macroeconomics and Monetary Economics (jel E), International Economics (jel F), G0 General
Tinbergen Institute Discussion Paper Series
Tinbergen Institute

van Marrewijk, J.G.M. (2005). Basic Exchange Rate Theories (No. TI 05-024/2). Tinbergen Institute Discussion Paper Series. Retrieved from