The Ratio Of The Monetary Model

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It is no surprise that there have been many literatures on the determination of exchange rates given the significant impact that movement in exchange rates have on a world’s political and economic stability as well as the welfare of individual countries. It plays an important role in international investments, company profits and a countries macroeconomic fundamental factor such as unemployment, wages and interest rates among others. This has led to the development of many models and economic theories, one of which is the monetary model. Despite this, economists still cannot agree as to which model best explains movement in exchange rates because the results obtained when testing different models often contradict one another.

Though the research in this paper doesn’t compare different economic models, it does look at the sticky and flexible price monetary model of exchange rate determination and its variables. The paper tests the adequacy of the monetary model – (how good a job the model does in explaining movement in exchange rates). It also shows how GDP, interest rates, money supply and inflation influences the nominal exchange rates for the Eurozone, Japan and the UK against the USD.

The aim of this research is to test if the sticky and flexible price monetary model is valid, which of the variables making up the model has the biggest impact in the movement of exchange rates for the case of the Eurozone, Japan and the UK, and comparing the results obtained to provide
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