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Nematrian Reference Library

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Summary "In this chapter we will attempt to explain the behaviour of exchange rates by analyzing the behaviour of supply and demand in the foreign exchange rate market. Recall that in Chapter I, we emphasized that exchange rates are just prices that are determined by supply and demand considerations. An imbalance in any market is corrected by an adjustment in price and/or quantity. In currency markets, excess demand or excess supply will be corrected by a change in exchange rates. We will present two different models that explicitly incorporate different views of the market for exchange rates: the balance of payment approach and the monetarist approach. The balance of payment approach treats exchange rates as determined in flow markets, while the asset approach treats exchange rates as any other asset price."

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