Abstract
This paper deals with the determinants of the exchange rate and develops a monetary view (or more generally, an asset view) of exchange rate determination. The first part traces some of the doctrinal origins of approaches to the analysis of equilibrium exchange rates. The second part examines some of the empirical hypotheses of the monetary approach as well as some features of the efficiency of the foreign exchange markets. Special emphasis is given to the role of expectations in exchange rate determination and a direct observable measure of expectations is proposed. The direct measure of expectations builds on the information that is contained in data from the forward market for foreign exchange. The empirical results are shown to be consistent with the hypotheses of the monetary approach.
“What, then, has determined and will determine the value of the Franc? First, the quantity, present and prospective, of the francs in circulation. Second, the amount of purchasing power which it suits the public to hold in that shape.” Keynes (Introduction to French edition, 1924, xviii).
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Frenkel, J.A. (1977). A Monetary Approach To The Exchange Rate: Doctrinal Aspects And Empirical Evidence. In: Herin, J., Lindbeck, A., Myhrman, J. (eds) Flexible Exchange Rates and Stabilization Policy. Palgrave Macmillan, London. https://doi.org/10.1007/978-1-349-03359-1_7
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DOI: https://doi.org/10.1007/978-1-349-03359-1_7
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