Exchange Rate Decision And The Wave Theory

Consideration about exchange rates is derived from my interests and curiosities over their fluctuations. Traditionally, theories on exchange rate determination are roughly distinguished into two alternative approaches, one of which emphases on long-run analysis, correspondingly, it gradually evolved from the purchasing power parity, through the flexible price monetary model, to the portfolio theory. The theory logic clue of such a approach has a transition from the long-run to short-run analysis, while, the other aims to the short-run analysis, therefore, it starts from the interest parity model, through the sticky price monetary model, to the rational expectation model of exchange rates determination, from which the developing clue of theory otherwise from the short-run to the long-run analysis could be perceived.Why the traditional theory of exchange rates determination could not adequately explain the exchange rate fluctuations, in large degree, as I regard, lies in that, fundamentally, the exchange rate fluctuations is reflection of relative change of two counterpart economies, therefore, the traditional exchange rate determination with its theory angle only limited in monetary field could not reach a reasonable exploration for the fluctuations. After all, the monetary theories themselves are the result of "methodology of dichotomy".How to break through the limitation of the "methodology of dichotomy" in the theories of exchange rate determination directs my tentatively endeavor to institute a new analysis approach. As regard with the limitation of traditional exchange rate determination, that is only limited in the monetary field itself, otherwise, I turn my research prospective to the "economic determination of the exchange rate ", which is what I shall and be doing now. Therefore, with such research clue in my mind, I redefine the relevant concepts about the exchange rates, distinguishing nominal exchange rate and real exchange rate, such distinguishing is not more a just symbolic classification of concepts than a premise for farther research on how the nominal and real exchange rate are determined individually. As to the real exchange rate level of the stratified concepts for exchange rate, money expression is only superficial reflection, in nature, the essence of the real exchange rate should be a ratio of two goods exchange, however, we could not realize such potential intuition, because market economy is a monetary economy, which has its influence on every comer of economy, nevertheless, with the view of the generation of money and its function evolution, after all, the monetary economy is based upon real economy, so, I intent to subtract and retrace out a concept for real exchange rate from a complicated money world, although it proved to be a difficulty work, it is compulsory for theory research. As to nominal exchange rate, it appears to be simple, but it is not the matter of fact. In essence, the nominal exchange rate is not only dominated by the monetary economy, but also fluctuate with it. However, the exchange rate formed by foreign exchange market is quite a little different from the one determined by themonetary economy, which lies in that the exchange rate through the foreign exchange market is only involved with trade sector of whole economy, while the nominal exchange rate by the monetary economy is not only with the trade sector, but also with the non-trade sector of the economy. Flexible trade between two relative trade sectors results in change of money exchange ratio in the foreign exchange market, it should be successful to reconsider the purchasing power parity in the trade sector with such resulted exchange rate, i.e. purchasing power parity is right, but it would be inaccurate to reconsider the purchasing power parity in whole economy, unless price level of the trade sector could dominates whole price level, or at least to be a representative share, or the inaccurate is inevitable. In all, it is the misalignment of the nominal exchange rate determined by the monetary ec...