Chapter 13 Exchange Rates and the Foreign Exchange Market: An Asset Approach November 2009 Preview The basics of exchange rates Exchange rates and the prices of goods Foreign exchange markets The demand for currency and other assets A model of foreign exchange markets
Exchange Rates and the Foreign Exchange Market: An Asset Approach
The main participants:
on euro deposits
expected rate of return = interest rate on dollar deposits
expected rate of appreciation of the euro
expected rate of return on euro depositsThe Demand for Foreign Currency Assets
What can the market for foreign exchange tell us about exchange rates?
If R↓, or Ee↑, or R*↑, then E↑.
EeValue of the Euro (E)