Document Type

Report

Publication Date

1979

Number

101

Abstract

Crucial to the comparison of fixed versus flexible exchange rates is the mechanism by which exchange rates are determined when governments do not directly support currencies. The monetary approach to exchange rate determination emphasized that an exchange rate is the relative price of two currencies; the equilibrium rate being that which equates desired and actual money stocks. Within this approach, both monetary and real phenomena affect the equilibrium exchange rate through their influence on the stock demand or supply for currencies. The fundamen tal idea of the monetary approach is that an asset pricing model must be used to examine exchange rate determination.

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