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HuangzhiyongHuangzhiyongNanjingUniversityofFinance&Economicshzy196896@sina.comTel：84028241Chapter5WhatDeterminesExchangeRates?MaincontentsThisChapterfocusesonthedeterminantsofexchangerates.Firstlyitfocusesonshort-runmovementsinexchangerates,thendiscussesthelong-termtrendsofexchangerateanditsdeterminants.ItintroducesthePPPtheoryandtheMonetaryapproach.Atlast,wediscusstheexchangerateovershootingandHowwellcanwepredictexchangerates?ThreetypesofvariabilityforExchangeratesLong-termtrendsMedium-termtrendsShort-termvariabilityFigure1,PanelASelectedExchangeRatesFigure2,PanelBMoreSelectedExchangeRatesAroadMapShort-termmovementsTheassetmarketapproachtoexchangeratesLong-termtrendsPurchasingpowerparity(PPP)ThemonetaryapproachtoexchangeratesFromtheshort-termflowintothemedium-termthenintothelong-termOvershoot一、Theshortrun：UIPUncoveredinternationalfinancialinvestmentanduncoveredinterestparityChangeinvariableDirectionofinternationalFinancialrepositioningeid￪id￬TodomesticassetsToforeignassetse￬e￪e￪e￬e￪e￬if￪if￬eex￪eex￬ToforeignassetsTodomesticassetsToforeignassetsTodomesticassetsDeterminantsoftheexchangerateintheshortrun二、Thelongrun:PPPPurchasingpowerparitylinksinflationandexchangeratemovements.PPPreferstothelawofonepriceinthemarketforgoodsandservices.Source:17thcenturyProminence:GustavCassel,1916-19181、ThelawofonepriceThelawofoneprice:identicalcommoditiesorgoodsmusthavethesamepriceinallmarkets.Whenmorethanonecurrencyisinvolved,thelawofonepricestatesthatwhenfinancialandcommoditymarketsareperfect(nocontrols,delays,transactionortransportationcost,etc.),identicalcommoditiesorgoodsmusthavethesamepriceinallmarketswhenquotedinacommoncurrency.fdPePThelowofonepriceworkswellforheavilytradedcommodities,eitheratapointintimeorforchangesovertime,aslongasgovernmentspermitfreetradeinthecommodity.Formanyproducts,thelawofonepricedoesnotholdclosely.Transportcosts;tradecontrol;imperfectcompetitive,ect;2、AbsolutePPPAbsolutePPPpos...