4607-4629. 3. STRUCTURAL MODELS OF EXCHANGE RATE DETERMINATION In this chapter we will attempt to explain the behavior of exchange rates by analyzing the behavior of supply and demand in the foreign exchange rate market. Extrapolation of the spot exchange rate at time t â 1 can explain oscillations in the ADVERTISEMENTS: Exchange rates are used to compare international prices of goods and services. Financial Management Assignment Help, Explain monetary approach to exchange rate determination, Derive and illustrate the monetary approach to exchange rate determination. Recall that in Chapter I, we emphasized ... 1.D The Monetary Approach to the BOP Problem 9Q from Chapter 6: Derive and explain the monetary approach to exchange rate de... Get solutions 43, pp. And it is viewed as one of the prices that equilibrates the international markets for various financial assets. Solution.pdf b. result in a depreciation of the Thai baht against the Yuan. The monetary model Derive and explain the monetary approach to exchange rate determination. Itâs Criticisms: The monetary approach to the balance of payments has been criticised on a number of counts: 1. The monetary approach posits that the equilibrium exchange rate is critically dependent on the money supply and money demand. Interest rate is the amount of currency that individual can earn by lending a unit of currency for a year. The Monetary Approach to the Balance of Payments focused attention upon the role of currencies as assets and hence viewed the exchange rate as a relative price of two assets. The traditional approach to empirical macro modelling has been to estimate the individual equations for all the endogenous variables in the system, and then to combine these to form a macro model. Oct 02 2019 09:12 PM. Expert's Answer. The exchange rate is the price of a financial asset (currency). (Krugman, Obstfeld, 2000, p.341). Exchange rate determination is very important for financial economists, financial institutions, foreign currency traders, and all professionals in the foreign currency market. a. Asset Model: Monetary Approach Spot exchange rate â¦ The purpose of this section is to consider the econometric validity of some popular models of exchange rate determination. 1. In the monetary approach, the exchange rate is determined directly by the relative price level via purchasing power parity (PPP). Answer: The monetary approach to exchange rate movements is based on two tenets: purchasing power parity and the quantity theory of money. The ECB operates a "twin pillar" approach, based on a 4.5% reference level for the annualised growth rate in the monetary aggregate M3; and a "broadly based assessment of the outlook for price developments", based on a range of other indicators: bond yields, consumer credit, the exchange rate, etc. Derive and explain the monetary approach to exchange rate determ. Typically, empirical interest rate and exchange rate equations and the predictive power of these equations were a key ingredient in the model. 1 Answer to Derive and explain the monetary approach to exchange rate determination. It is depending on two tenets: purchasing power parity & the quantity theory of money. Jan 12 2014 08:12 PM. 9. The model is characterized as "monetary" because it assumes the existence of a stable money demand function and integrated world markets. Finally, in Section 4, the flexible-price unrestricted monetary model for the case of This chapter is based on discussions of exchange rate determination on a school of thought, using the asset market approach to solve complex problems. To calculate the percentage discrepancy, take the difference between the two exchange rates, and divide it by the market exchange rate: 1.37 - 1.33 = â¦ Inflow of foreign exchange reserves lending a unit of currency that individual can earn by lending a unit of that... 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