Macro Approaches to Foreign Exchange Determination

Abstract

This chapter reviews a number of models of exchange rate developed during the post-Bretton Woods era with special attention to two major strands of models that dominated the literature: the monetary and portfolio balance approaches. The approaches are broken down into categories of nominal and real exchange-rate models, with particular reference to the empirical evidence. The chapter also discusses recent approaches that do not neatly fall into either categorization. Although the underpinnings of these models are quite unsatisfying from the perspective of recent theoretical developments, they remain the workhorses of empirical exchange-rate modeling. Most of the empirical evidence discussed in the chapter comes from reduced form or quasi-reduced form specifications, rather from structural (calibrated) models of economies. Purchasing power parity (PPP) is a particularly simple version of the real exchange rate, where the real exchange rate is assumed to be constant. Controlled Vocabulary Terms exchange-rate modeling; foreign exchange determination; monetary model; nominal exchange rate models; purchasing power parity; real exchange rate

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