The Research Of Foreign Exchange Linkage Mechanism Base On Sticky-price Monetary Approach

The research of foreign exchange linkage Mechanism is about the relationship of foreign exchange between interest rate and monetary supply. Both monetary approach and portfolio balance approach try to explain the internal rule beyond foreign exchange linkage mechanism. Due to the hardly obtained data, it's not easy to test the portfolio balance approach.Today, In the process of financial globalization, it's hard to use sticky-price monetary approach to explain the fluctuation of foreign exchange. Mostly the experiment results not support the over-shooting model. This paper use sticky-price monetary approach to solve the problem. Base on US-UK two countries time serials of foreign exchange rate,interest rate and monetary supply, we can find when two countries certain conditions are satisfied, the fluctuation of foreign exchange follows the over-shooting model rules. This fluctuation mechanism can use simple and easily obtained data to forecast or explain foreign exchange trends. Besides, understanding of sticky-price monetary approach, especially the correction of later model, can avoid the improper error.