A Study Of Monetary Exchange Rate Theory And Models

Monetary exchange rate theory is one of the most important and profound exchange rate theories. It adds the money factor to exchange rate theory, and combines the theory of purchasing power parity with monetary amount equation to establish the basic monetary model, which reflects the relation between exchange rate and other economic factors such as money supply, yield, rate and so on. And there are also other monetary exchange rate models, for example, the flexible-price monetary model and the sticky-price model. Since the 1960s the monetary exchange rate models have been used to forecast exchange rate, but the result is not very good, and it is even worse than the simply random model. It is necessary and important to research the reasons why the monetary exchange rate model is not perfect.This paper mainly presents the history of monetary exchange rate theory and its models, for example the basic monetary model, the flexible-price monetary model and the sticky-price model, after which it reviews the literature on forecasting exchange rates with monetary fundamentals, and at last it discusses the reasons why the monetary exchange model cannot forecast exchange rate perfectly, especially in short-term.