Chapter 6

Setting Up the Monetary Approach to Balance of Payments

In This Chapter

arrow Examining the foreign exchange market from an international investor’s point of view

arrow Relating the domestic money markets of two countries to the foreign exchange market

arrow Explaining how investors interpret the changes in monetary policy

arrow Explaining how investors’ interpretation of monetary policy affects exchange rates

Chapter 5 covers the demand-supply approach to exchange rate determination. This chapter introduces an alternative theory of exchange rate determination. While the demand-supply model assumes that both international trade- and international investment-related factors change exchange rates, the Monetary Approach to Balance of Payment (MBOP) takes only international investment into account. In other words, the MBOP views the subject of exchange rate determination from the point of view of international investors.

In this chapter, you’ll imagine investors trying to decide between two securities denominated in two different currencies. The answer to the question “How will they decide?” lies ...

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