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Asset market approach to exchange rate determination

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  • Mensah, Isaac Quao

Abstract

The paper provides an analysis of exchange rate determination using an asset market approach model. The analysis includes exchange rate response to changes in government policies which are unanticipated and to changes in government policies which are anticipated before they occur. It is shown that the announcement of an expansionary policy will cause the exchange rate to depreciate, which induces balance of trade surplus and hence, external assets accumulation, before the policy is implemented. Empirical results accord well with the model, in particular they establish the positive relationship between anticipated money and the spot exchange rate. The results also support the hypothesis that anticipated expansionary monetary policy has a smaller impact on the exchange rate than the effect of unanticipated expansionary monetary policy.

Suggested Citation

  • Mensah, Isaac Quao, 1982. "Asset market approach to exchange rate determination," ISU General Staff Papers 198201010800008057, Iowa State University, Department of Economics.
    • Handle: RePEc:isu:genstf:198201010800008057
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    References listed on IDEAS

    as
    1. Barro, Robert J, 1978. "Unanticipated Money, Output, and the Price Level in the United States," Journal of Political Economy, University of Chicago Press, vol. 86(4), pages 549-580, August.
    2. Turnovsky, Stephen J., 1976. "The dynamics of fiscal policy in an open economy," Journal of International Economics, Elsevier, vol. 6(2), pages 115-142, May.
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    8. Brock, William A., 1975. "A simple perfect foresight monetary model," Journal of Monetary Economics, Elsevier, vol. 1(2), pages 133-150, April.
    9. Barro, Robert J, 1977. "Unanticipated Money Growth and Unemployment in the United States," American Economic Review, American Economic Association, vol. 67(2), pages 101-115, March.
    10. Girton, Lance & Roper, Don, 1977. "A Monetary Model of Exchange Market Pressure Applied to the Postwar Canadian Experience," American Economic Review, American Economic Association, vol. 67(4), pages 537-548, September.
    11. Branson, William H. & Halttunen, Hannu & Masson, Paul, 1977. "Exchange rates in the short run: The dollar-dentschemark rate," European Economic Review, Elsevier, vol. 10(3), pages 303-324.
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