Exchange Rate

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What Determines (Or Changes) Exchange Rates

You may know today’s dollar–euro exchange rate. But it will be something else next year. How do you predict what the exchange rate will be? Which factors are helpful in predicting the change in exchange [more…]

Does the Type of Money Matter for the Exchange Rate?

A close relationship exists between the type of money and the exchange rate regime. A monetary system based on a metallic standard such as the gold standard leads to a fixed exchange rate regime. For a [more…]

The Role of Multinational Firms in Foreign Exchange Markets

The term multinational firm refers to a wide range of domestic firms that are engaged in business with foreign countries in different ways. One point to remember is that, independent of the type of foreign [more…]

The Roles of Speculators and Central Banks in Foreign Exchange Markets

Speculators and central banks are important participants in foreign exchange markets. Speculators invest in assets denominated in different currencies and, therefore, buy or sell currencies. Central banks [more…]

How to Figure the Absolute and Relative Purchasing Power Parity (PPP)

The Purchasing Power Parity (PPP) implies that the changes in two countries’ price levels affect the exchange rate. According to the PPP, when a country’s inflation rate rises relative to that of the other [more…]

How to Work with the Purchasing Power Parity (PPP)

You need to understand how the PPP is derived. Understanding the relationship between inflation differentials and changes in the exchange rate enables you to attach a number to the change in the exchange [more…]

Empirical Evidence on the (Relative) Purchasing Power Parity (PPP)

The PPP implies a long-run relationship between the changes in the exchange rate and inflation rate differential between two countries. The idea is that these variables should move together in the same [more…]

Maintain the Internal Balance of the Metallic Standard

The term internal balance refers to full employment with price stability, which is a tall order. Full employment does not refer to 0 percent unemployment. It implies a positive unemployment rate at which [more…]

Exchange Rates in a Commodity Standard System

A metallic standard in more than one country implies a fixed exchange rate. For example, if the international monetary system is a gold standard, each country defines the price of its currency in gold [more…]

Exchange Rates in a Fiat Money System

A fiat currency has no intrinsic value. In other words, its value is not based on a precious metal. Monetary policy determines the purchasing power of the currency. The exchange rate regime involving fiat [more…]

Advantages and Disadvantages of Floating Exchange Rates

Fiat currency doesn’t imply a fixed exchange rate. In fact, fiat currencies are compatible with a floating exchange rate regime, in which the value of a currency is determined in foreign exchange markets [more…]

Unilaterally Pegged Exchange Rates

Unilateral currency pegs appeared following the end of the Bretton Woods era. The difference between the pegged exchange rate regimes of pre- and post-1973 periods stems from the different types of money [more…]

Attract Foreign Investors with Soft Pegs

Some soft pegs are implemented for other reasons than international trade. The aim here isn’t to make exports or imports less expensive. Some soft pegs are introduced to attract foreign investors to the [more…]

The IMF’s Role in the Post–Bretton Woods Era

The International Monetary Fund (IMF) was originally a Bretton Woods organization. At the Bretton Woods Conference of 1944, it was clear that the post–World War II international monetary system was going [more…]

Does IMF Support Provide Stability or Create Moral Hazard?

Because the International Monetary Fund (IMF) support to countries without pegged exchange rates is still new, not much evidence indicates what this kind of support achieves. However, the IMF’s support [more…]

The Advantages and Disadvantages of Fixed Exchange Rates

Professional and laymen alike have an opinion about what kind of an international monetary system the world should have. A metallic standard system such as the gold standard or the reserve currency standard [more…]

The Advantages and Disadvantages of Flexible Exchange Rates

During wars and other military conflicts, the gold standard was abandoned. During these times, fiat currency and, consequently, flexible exchange rates ruled. Therefore, the post–Bretton Woods era starting [more…]

Alternative Exchange Rate Regimes

In addition to the fixed and flexible exchange rate regimes, intermediate foreign exchange regimes also have appeared in the post–Bretton Woods era. Pegged exchange rates, especially the soft or crawling [more…]

Intervention into Floating Exchange Rates

A completely floating currency exists only in textbooks. Terms like dirty float or managed float refer to exchange rate regimes in which exchange rates are largely determined in foreign exchange markets [more…]

Countries Manage Economic Development with Soft Pegs

One of the reasons for a country to consider a soft peg is that the country wants to manage its exchange rate, to promote its policy of economic development. In such a case, the country can overvalue or [more…]

Supply and Demand: Bartering Apples per Orange Example

Think about a barter economy that uses no money and in which people exchange oranges for apples. Basically, in the orange market, some people do have a demand for oranges. Other people produce oranges [more…]

How to Determine Exchange Rates through Supply and Demand

The demand–supply framework enables you to predict the next period’s exchange rate. When you understand this framework, you’ll be able to predict the direction of the change in the exchange rate — in other [more…]

Predict Changes in the Euro–Dollar Exchange Rate

Here, you can see how a change in each of the macroeconomic fundamentals (inflation rate, growth rate, interest rate, and government restrictions) is applied to the dollar market. [more…]

The Monetary Approach to Balance of Payment

Following is a discussion regarding the assumptions and the general setup of the Monetary Approach to Balance of Payment (MBOP). You also compare the MBOP’s approach to the demand–supply model. In Economics [more…]

Demand for Money in the Money Market

The demand curve for money is called the liquidity preference,for a good reason. This curve drawn in the real interest rate/real quantity of money space shows how much money you want to keep in your pocket [more…]

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