Contents -- Preface -- List of Tables -- List of Figures -- List of Acronyms -- Currency Abbreviations -- 1. Why DoWe Study Exchange Rates? -- 1.1. Introduction -- 1.2. The Importance of Exchange Rates -- 1.2.1. The Exchange Rate and Business Operations -- 1.2.2. The Exchange Rate and Macroeconomic Policy -- 1.2.3. Macroeconomic Linkages Through Exchange Rates -- 1.3. Stylized Facts and Figures -- 1.3.1. Stylized Facts: Exchange Rates Only -- 1.3.2. Stylized Facts: Spot Rates, Forward Rates, and Macroeconomic Variables -- 1.4. Exchange Rates and Other Financial Prices: The Subprime Crisis as an Example -- 1.5. Exchange Rate Regimes -- 1.5.1. Exchange Rate Regime Classification -- 1.5.2. Exchange Rate Regime Verification -- 1.6. What Is to Come -- 2. Exchange Rate Determination in the Mundell-Fleming Model -- 2.1. Introduction -- 2.2. Disequilibrium Systems and Alternative Adjustment Mechanisms -- 2.3. Efficacy of Fixed and Flexible Exchange Rates -- 2.4. Dynamic Adjustment Under Fixed and Flexible Exchange Rates -- 2.5. Dynamic Adjustment and the Role of Capital Mobility -- 2.6. The Appropriate Use of Monetary and Fiscal Policies -- 2.7. Stabilization Policies Under Fixed and Flexible Exchange Rates -- 2.8. The Standard Mundell-Fleming Model -- 2.8.1. Fundamental Propositions of the Mundell- Fleming Model -- 2.8.2. The Structure of the Mundell-Fleming Model -- 2.9. The Reduced Form Equation of the Equilibrium Exchange Rate -- 2.9.1. The Current Account -- 2.9.2. The Capital Account -- 2.10. Stabilization Policies Under Alternative Exchange Rate Regimes -- 2.10.1. Fixed Exchange Rates, Capital Mobility and Stabilization Policies -- 2.10.2. Flexible Exchange Rates, Capital Mobility, and Stabilization Policies -- 2.11. A Critique of Mundell's Results About Stabilization Policies -- 2.11.1. McLeod's Critique of Mundell's Results.

2.11.2. Niehans's Doubts About the Efficacy of Monetary Policy -- 2.12. Recapitulation -- 3. The Flexible-Price Monetary Model of Exchange Rates -- 3.1. Introduction -- 3.2. Key Propositions of the Flexible-Price Monetary Model -- 3.3. The Specification of the Flexible-Price Monetary Model -- 3.4. A Digrammatic Representation of the Flexible-Price Monetary Model -- 3.5. Some Variants of the Flexible-Price Monetary Model -- 3.5.1. The Rational Expectations Monetary Model -- 3.5.2. Frankel's Flexible-Price Monetary Model with aWealth Effect -- 3.5.3. A General Monetary Model of Exchange Rates -- 3.6. Policy Implications of the Flexible-Price Monetary Model -- 3.7. Recapitulation -- 4. The Theory of the Balance of Payments -- 4.1. The Price-Specie Flow Mechanism -- 4.2. The Elasticities Approach and the J-Curve Effect -- 4.3. The Keynesian Multiplier Approach -- 4.4. The Income Absorption Approach -- 4.5. The Monetary Approach to the Balance of Payments -- 4.5.1. Fundamental Propositions of the Monetary Approach -- 4.5.2. A Simple Monetary Model of the Balance of Payments -- 4.5.3. A Diagrammatic Representation of the Monetary Approach -- 4.5.4. An Expanded Monetary Model of the Balance of Payments -- 4.5.5. Policy Implications of the Monetary Approach -- 4.6. A Comparison of the Monetary and Keynesian Models -- 4.7. A Synthesis of Monetary and Keynesian Approaches -- 4.8. Recapitulation -- 5. Exchange Rate Determination in the Dornbusch Model -- 5.1. Introduction -- 5.2. Fundamental Propositions of the Dornbusch Model -- 5.3. In Defense of the Mundell-Fleming Model -- 5.3.1. A Restatement of the Mundell-Fleming Model -- 5.3.2. Exchange Rate Expectations and Adjustment to Monetary Expansion -- 5.3.3. Failure of the Marshall-Lerner Condition -- 5.3.4. Exchange Rate Overshooting and Aggregate Spending -- 5.4. Short- and Long-Run Views of Exchange Rates.

5.4.1. Exchange Rate Determination in the Short Run -- 5.4.2. Exchange Rate Determination in the Long Run -- 5.4.3. Interaction Between Goods and Asset Markets -- 5.5. The Overshooting Model of Exchange Rates -- 5.5.1. The Structure of the Dornbusch Model -- 5.5.2. Adjustment to Monetary Expansion -- 5.6. The Reduced Form Equation of the Equilibrium Exchange Rate -- 5.7. Recapitulation -- 6. Other Sticky-Price Monetary Models of Exchange Rates -- 6.1. Introduction -- 6.2. The Real Interest Differential Monetary Model -- 6.2.1. Moderate Inflation and the Exchange Rate Expectations Scheme -- 6.2.2. A More General Model of Exchange Rate Determination -- 6.3. Driskell's Generalized Stock-Flow Sticky-Price Model -- 6.3.1. The Dornbusch Model in Discrete Time -- 6.3.2. The Stock-Flow Model -- 6.4. The Equilibrium Real Exchange Rate Monetary Model -- 6.4.1. The Expectation Mechanism and Exchange Rate Determination -- 6.4.2. The Equilibrium Real Exchange Rate and Current Account -- 6.4.3. The Reduced-Form Equation of Exchange Rate Determination -- 6.4.4. The Impact of the Risk Premium on the Exchange Rate -- 6.5. The Buiter-Miller Model with Core Inflation Rate -- 6.6. Frankel's Sticky-Price Model with aWealth Effect -- 6.7. Recapitulation -- 7. The Monetary Model of Exchange Market Pressure -- 7.1. Introduction -- 7.2. The Exchange Market Pressure Model of Exchange Rates -- 7.3. Exchange Market Pressure and Monetary Independence -- 7.4. A Simple Version of the Girton-Roper Market Pressure Model -- 7.5. An Expanded Version of the Girton-Roper Market Pressure Model -- 7.6. Recapitulation -- 8. The Portfolio Balance Model of Exchange Rates -- 8.1. Introduction -- 8.2. The Portfolio Balance Effect of Wealth and the Exchange Rate -- 8.3. The Current Account in the Portfolio Balance Model -- 8.4. The Structure of the Portfolio Balance Model.

8.5. Short-Run Properties of the Portfolio Balance Model -- 8.6. Stable Portfolio Balance and Short-Run Exchange Rate Determination -- 8.7. Monetary Policy Effects on Exchange and Interest Rates -- 8.7.1. Monetary Expansion via Open Market Purchases of Domestic Bonds -- 8.7.2. Monetary Expansion via Open Market Purchases of Foreign Bonds -- 8.7.3. Sterilized Open Market Foreign Exchange Operations -- 8.7.4. A Rise inWealth via Accumulation of Foreign Assets -- 8.8. Fiscal Policy Effects on Exchange and Interest Rates -- 8.8.1. Money-Financed Government Budget Deficit -- 8.8.2. Bond-Financed Government Budget Deficit -- 8.9. Alternative Specifications of the Portfolio Balance Model -- 8.10. A Synthesis of the Monetary and Portfolio Balance Models -- 8.11. The Portfolio Balance Model with a Banking Sector -- 8.11.1. The Model -- 8.11.2. The Impact of Monetary Policy on Exchange and Lending Rates -- 8.12. The Portfolio Balance Model with Bank Lending -- 8.13. Recapitulation -- 9. The Currency Substitution Model of Exchange Rates -- 9.1. Introduction -- 9.2. Currency Substitution and Dollarization -- 9.3. Implications of Currency Substitution -- 9.4. Determinants of Currency Substitution -- 9.5. Exchange Rate Determination Under Currency Substitution -- 9.6. The Calvo-Rodriguez Overshooting Currency Substitution Model -- 9.6.1. Assumptions of the Model -- 9.6.2. The Asset Market -- 9.6.3. The Goods Market -- 9.6.4. A Diagrammatic Illustration of the Currency Substitution Model -- 9.7. The Importance of Currency Substitution in a Regional Setting -- 9.8. Some Policy and Analytical Issues Related to Currency Substitution -- 9.8.1. Should Currency Substitution be Encouraged? -- 9.8.2. Discouraging the Use of Foreign Currencies -- 9.8.3. Currency Substitution and Nominal Anchors -- 9.8.4. Monetary Expansion and the Real Exchange Rate.

9.8.5. Inflationary Finance under Currency Substitution -- 9.9. Recapitulation -- 10. The Microstructure Approach to Exchange Rates -- 10.1. Macroeconomic Models: Failure and Alternatives -- 10.2. The Microstructure Models of Exchange Rates -- 10.2.1. Assumptions of Microstructure Models -- 10.2.2. Exchange Rate Determination in Microstructure Models -- 10.2.3. Information Models versus Inventory Models -- 10.3. Factors Affecting Exchange Rates in Microstructure Models -- 10.3.1. Order Flow -- 10.3.2. The Bid-Offer Spread -- 10.4. The Microstructure Solution to the Determination Puzzle -- 10.5. The Microstructure Solution to the Excess Volatility Puzzle -- 10.6. The Microstructure Solution to the Forward Bias Puzzle -- 10.6.1. The Statistician's Perspective on Forward Bias -- 10.6.2. The Economist's Perspective on Forward Bias -- 10.6.3. The Practitioner's Perspective: Limits to Speculation -- 10.6.4. A Simple Explanation: Model Misspecification -- 10.7. Recapitulation -- 11. The News Model of Exchange Rates -- 11.1. Introduction -- 11.2. The Role of News in Macroeconomic Models of Exchange Rates -- 11.2.1. The News Framework of the Flow Model -- 11.2.2. The News Framework of the Monetary Models -- 11.2.3. The News Framework of the Portfolio Balance Models -- 11.3. The Role of News in the Microstructure Models of Exchange Rates -- 11.3.1. The Link Between Macroeconomic Fundamentals and Exchange Rates -- 11.3.2. The Link Between Order Flow and Macroeconomic News -- 11.4. Recapitulation -- 12. Empirical Evidence on the Macroeconomic Models of Exchange Rates -- 12.1. Evidence on the Mundell-Fleming Model -- 12.2. Evidence on the Monetary Model of Exchange Rates -- 12.2.1. Evidence Based on Conventional Econometric Methods -- 12.2.2. Out-of-Sample Forecasting -- 12.2.3. Cointegration-Based Dynamic Models -- 12.2.4. Simultaneous Equation Models.

12.3. Evidence on the Monetary Model Under Rational Expectations.