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The Economics of Exchange Rates (Collected Works of Harry Johnson) by Harry G. Johnson, Jacob A. Frenkel

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CHAPTER 3

THE EXCHANGE RATE, THE BALANCE OF PAYMENTS, AND MONETARY AND FISCAL POLICY UNDER A REGIME OF CONTROLLED FLOATING

MICHAEL MUSSA

University of Chicago, Chicago, Illinois, USA

ABSTRACT

This paper considers the extension of the fundamental principles of the monetary approach to balance of payments analysis to a regime of floating exchange rates, with active intervention by the authorities to control rate movements. It makes four main points. First, the exchange rate is the relative price of different national monies, rather than national outputs, and is determined primarily by the demands and supplies of stocks of different national monies. Second, exchange rates are strongly influenced by asset holders’ expectations of future exchange ...

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