Factors determining exchange rates: the roles of relative price levels, balances of payments, interest rates and risk

This paper focuses on an accounting framework that is useful for distinguishing between the effects on exchange rates of four separate factors: relative price levels, balances of payments, interest rates and risk. The framework rests upon an approximate identity, which is transformed into a behavioural model of exchange rates. The model is then applied in an attempt to explain the month-to-month behaviour of the US dollar versus the Deutsche Mark during the 1975-79 period.