Inside the Currency Market: Mechanics, Valuation, and Strategies

Exchange Rates: The Impact of Keynes and Mundell-Fleming

When one ponders the question of what is or what should be the price of one currency in relation to another, the modern day and accepted answer is the nominal or real exchange rate, the purchasing power parity, or balance of payment models. How these models were derived should be the question, as well as their validity. A brief walk through history will help to explain.

Classical theorists focused their attention on monetary policy as it relates to the level of prices in an economy in terms of the money supply. They believed that as the money supply increased, price levels would increase along with the exchange rate without any dramatic effects to an economy in terms of growth and output. ...