Introduction
The Monetary Approach focuses on the supply and demand of money and the money supply process. The monetary approach hypothesizes that BOP and exchange-rate movements result from changes in money supply and demand.
Monetary Approach
Monetary Approach
Monetary Approach
Monetary Approach
An Example
Suppose the domestic monetary authorities increase the monetary base through an open market purchase of domestic securities. As the domestic money supply increases, the domestic interest rate falls. With a lower interest, households are no longer satisfied with their portfolio allocation. The demand for domestic bonds falls relative to other financial assets.
Daniels and VanHoose Monetary Approach 17
Example - Continued
Households shift out of domestic bonds. They substitute into domestic money and foreign bonds. Because of the increase in demand for foreign bonds, the demand for foreign currency rises. All other things constant, the increased demand for foreign currency causes the domestic currency to depreciate.
Monetary Approach
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SFC S2 S1 DFC
DFC Q1 Q2
Daniels and VanHoose
Monetary Approach
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