EXCHANGE RATE THEORIES

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EXCHANGE RATE THEORIES by Mind Map: EXCHANGE RATE THEORIES

1. Source: http://econom.chnu.edu.ua/wp-content/uploads/2017/02/THE-EVOLUTION-OF-CURRENCY-RELATIONS.pdf

2. The purchasing power parity theory

2.1. The exchange rate should be set on the basis of purchasing power parity, depending on the level of domestic and international prices.

3. Keynes theory

3.1. the moving parities theory

3.2. the neutral rates theory

3.2.1. The basic tenet of the neutral rates theory is a need to set the exchange rate at a level which will provide a balance of payments equilibrium.

4. The fixed parities and rates theory

4.1. (Graham, 1941)

5. The key currency theory

5.1. the cross rates of other currencies should be set in relation to the key currency.

6. Mundell-Fleming Model

6.1. The exchange rate is determined by the balance of payments dynamic.

7. The floating exchange rates theory

7.1. This theory, based on the monetarist views, provides market self- regulation of the exchange rate.

8. The normative theory of exchange rate

8.1. Exchange rate policy of one country may cause deviation of economic equilibrium to another.

9. The theory of capital assets

9.1. The exchange rate is determined by the level of interest rates in different countries.

10. The portfolio balance theory

10.1. The exchange rate primarily affect decisions of economic agents regarding the distribution of domestic and foreign assets.

11. The elasticity theory

11.1. The effect of exchange rate changes on the foreign trade balance of the country depends on the exchange rate elasticity of exports and imports.

12. optimum currency areas theory

12.1. The main criteria for the formation of an optimum currency area is the mobility of factors of production, flexibility of prices and wages, and the integration of financial markets.