Abstract:
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.
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