Exchange Rates: Fixed and Floating

Abstract

Exchange rates are essentially a monetary phenomenon because an exchange rate is the price at which the currency of one country is exchangeable for another. The main causal influences on exchange rates are money and interest, although real economic activity, and the expected returns on real assets (as well as financial ones) also have a bearing. The consequences of changes in exchange rates are chiefly on prices, at least in the long run, but there are also important effects on economic activity, especially in the sectors most exposed to international competition.