Book contents
- Frontmatter
- Contents
- List of figures
- List of tables
- Preface
- List of standard symbols
- Introduction
- Part 1 Financial markets
- 1 The foreign exchange market
- 2 Portfolio choice, risk premia and capital mobility
- 3 Money
- 4 The monetary theory of the exchange rate
- Part 2 The open economy
- Part 3 Policy issues
- Appendixes
- Notes
- Bibliography
- Index
1 - The foreign exchange market
Published online by Cambridge University Press: 06 July 2010
- Frontmatter
- Contents
- List of figures
- List of tables
- Preface
- List of standard symbols
- Introduction
- Part 1 Financial markets
- 1 The foreign exchange market
- 2 Portfolio choice, risk premia and capital mobility
- 3 Money
- 4 The monetary theory of the exchange rate
- Part 2 The open economy
- Part 3 Policy issues
- Appendixes
- Notes
- Bibliography
- Index
Summary
This chapter gives a first description of how the exchange rate and the foreign exchange reserves of a country are determined. We assume that the country is ‘small’, which in this context means just that foreign interest rates are given exogenously. The country may still be able to influence the interest rate on assets denominated in its own currency. A central topic is how far this influence goes, and what the consequences are of setting interest rates which deviate from those abroad. More details of the plan for the chapter are given towards the end of section 1.1, after we have introduced some basic concepts.
Some basic concepts
An exchange rate is the price of one currency in terms of another. In most of the chapters of this book we focus on a single country, and abstract from the fact that the rest of the world consists of many countries with different currencies. When we speak of the ‘exchange rate’, it is then the price of the single foreign currency in terms of the currency of the country in focus. As a shorthand we shall often refer to the foreign currency as dollars, and the domestic currency as kroner. The exchange rate is then the price of dollars in kroner.
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- Open Economy Macroeconomics , pp. 9 - 39Publisher: Cambridge University PressPrint publication year: 2000