Chapter 15

Extensions and Challenges to the Monetary Approach

Abstract

This chapter considers some of the extensions and challenges to the monetary approach of exchange rate (MAER) determination. Five different extensions to the MAER approach are examined. The first is the “news” approach, which allows the MAER to be forward-looking. The portfolio-balance approach and the trade balance approach both add missing variables to the MAER relationships, whereas the overshooting approach and the currency substitution approach extend the MAER approach by adjusting the underlying equation. Finally, the chapter discusses some fundamentals of the “new thinking” of the New International Macroeconomics, including recent innovations and challenges to the MAER ...

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