Synopsis

The erratic behavior of international exchange rates after the demise of the Bretton Woods system of fixed rates has led to a "bewildering" variety of models in exchange rate theory, according to Visser (international economics, Vrije U., the Netherlands). In order to explain the various models, he first categorizes them according to the period for which their explanation of the exchange rate is relevant. He covers asset (or very short period) models, in which exchange-rate movements are explained by capital flows; short period models focused on capital flows and payments and receipts on the current account; long period models, which add an equilibrium condition regarding the current account and the capital account; and very long period models where ideally purchasing power parity prevails. After discussing the models, he concludes with chapters on the policies required to maintain fixed exchange rates or prevent excessive volatility in flexible-rate systems, and the theory of optimal currency area and monetary unions.