Teaching Foreign Exchange Markets: When Quantities Matter

In a world dominated by large economies with flexible exchange rates and predictable market forces, quantities of currencies bought and sold would warrant very little attention. Models illustrating and explaining foreign exchange markets would focus almost exclusively on prices, i.e. exchange rates, and not quantities. In our paper we argue the world economy described above does not exist and therefore quantities do matter. Furthermore, we argue that the number of countries which have pursued an export-led growth policy since WWII, and the number that might do so in the future, necessitates a foreign exchange model that allows students to focus more easily on the role that quantities play in understanding fixed exchange rates, sovereign wealth funds, undervalued (overvalued) currencies, etc. In our paper we provide a model which emphasizes quantities of currencies not just exchange rates. Using our model students can more easily understand why, for example, an export-led growth policy and a sovereign wealth fund are two sides of the same coin.