Handbook of Critical Issues in Finance
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Handbook of Critical Issues in Finance

  • Elgar original reference

Edited by Jan Toporowski and Jo Michell

This vital new Handbook is an authoritative volume presenting key issues in finance that have been widely discussed in the financial markets but have been neglected in textbooks and the usual compilations of conventional academic wisdom.
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Chapter 12: The exchange rate

Annina Kaltenbrunner

Extract

Few topics of investigation have occupied mainstream economic theory as much as the attempt to understand, explain or even forecast exchange rate movements. As such, exchange rate theory has evolved in interdependence with a changing international economic environment and shifting paradigms in economic theory. This, however, changed nothing of the neoclassical view of the exchange rate as a market equilibrating price, which stands in a causal and permanent relationship with underlying ‘fundamentals’ and remains firmly embedded in the classical dichotomy. This is also true for the Marxist approach of the real exchange rate based on the principle of absolute cost advantage. The important structural component of international monetary relations is highlighted in Marx’s concept of ‘world money’. Post-Keynesian approaches in contrast – in line with their view of economies as essential monetary economies – stress the role of the exchange rate as an asset class per se and the driving role of expectations in short-term financial markets, both in the short and the long run.

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