The theory of forexbrokercashback Best forex trade cashback determ cashback forexation(ExchangeRateDeterminationTheory)Overview of the theory of exchange rate determination The theory of exchange rate determination Bestforextradecashback one of the core elements of international financial theory, mainly to analyze what factors determine bestcashbackprogramsforex influence the exchange rate The theory of exchange rate determination develops with the economic situation and the development of Western economic theory, for a countrys monetary bureau to formulate exchange rate policy Provide theoretical basis for exchange rate determination theory mainly includes the theory of International Indebtedness, the theory of PurchasingPowerParity, the theory of InterestRateParity The theory of the balance of payments, the theory of the asset market, the theory of the asset market is divided into the monetary analysis (MonetaryApproach) and the asset portfolio analysis (PortfolioApproach). Sticky-priceMonetaryApproach)The content of the theory of exchange rate determination International borrowing and lending theory (TheoryofInternationalIndebtedness) appeared and prevailed in the gold standard period theoretical origins can be traced back to the 14th century, in 1961, the British scholar G.I. Goschen more completely proposed the theory of international borrowing and lending. Goschen more completely put forward the theory that: the exchange rate is determined by the supply and demand in the foreign exchange market and foreign exchange supply and demand and from international lending international lending is divided into fixed lending and liquid lending the former refers to the lending relationship has been formed, but not into the actual payment stage of lending; the latter refers to the payment stage of lending only the changes in liquid lending will affect the supply and demand of foreign exchange the shortcomings of this theory is It is not clear which factors are specifically affected by the supply and demand of foreign exchange purchasing power parity theory purchasing power parity theory (TheoryofPurchasingPowerParity) of the theoretical origins can be traced back to the 16th century in 1914, the outbreak of the First World War, the collapse of the gold standard, the national currency issue to get rid of the restraint, resulting in soaring prices, the exchange rate fluctuations In 1922, Swedish scholar Cassel published a book "Money and Foreign Exchange after 1914", which systematically elaborated the doctrine of purchasing power parity (PPP) The doctrine holds that the exchange rate between two currencies is determined by the ratio of the purchasing power of each of the two currencies (absolute PPP), and the movement of the exchange rate also depends on the movement of the purchasing power of the two currencies (relative PPP) Suppose that the price level of country A is PA and the price level of country B is PA. Assume that the price level of country A is PA, the price level of country B is PB, and e is the exchange rate of country As currency (direct price method), then according to the absolute PPP doctrine: e=PA/PB Assume that the price level of country A in period t0 is PA0, the price level of country B is PB0, and the exchange rate of country As currency is e0, the price level of country A in period t1 is PA1, the price level of country B is PB1, and the exchange rate of country As currency is e1PA is the exchange rate of country As currency. The exchange rate is e1PA is the price index of country A in period t1 based on period t0, PB is the price index of country B in period t1 based on period t0, then according to the doctrine of relative purchasing power parity, relative purchasing power parity means that the exchange rate is determined by the inflation rate of both countries. It ignores the cost of trade and trade barriers and does not take into account the natural environment in which people live (e.g., environmental protection, greenery, and the degree of infrastructure) or the social environment in which people live (e.g., institutions, social stability, and social civilization); 2) it does not take into account the impact of increasingly large capital flows on the exchange rate; 3) there are some technical problems with the general price level ( Price index) is difficult to calculate, the difficulty lies in: what price index to choose, whether it is the consumer price index (CPI), or the GDP deflator, or other indices even if the index is selected, how to choose the sample goods is also a problem; 4) overemphasis on the role of prices on the exchange rate, but this role is not absolute, exchange rate changes will also affect prices; 5) relative purchasing power parity doctrine has a premise that the exchange rate in period t0, e0, is the equilibrium exchange rate, if the exchange rate in period t0 is unbalanced, then e1 cannot be equilibrium interest rate parity theory The theoretical origins of the theory of interest rate parity (TheoryofInterestRateParity) can be traced back to the second half of the 19th century, 1923 by Keynes systematically elaborated the theory of interest rate parity that between two countries The main starting point of the theory is that the short-term interest rate returns obtained by investors investing in the country should be equal to the short-term investment returns obtained by converting the spot rate into foreign currency and buying back the national currency at the forward rate once the difference in investment returns caused by the difference in interest rates between the two countries, investors will carry out arbitrage activities. The result is that the forward exchange rate is fixed at a particular equilibrium level. Compared to the spot rate, the forward exchange rate of the currency of the country with low interest rates will fall, while the forward exchange rate of the currency of the country with high interest rates will rise. -The interest rate parity doctrine can be divided into CoveredInterestRateParity and UncoveredInterestRateParity. CoveredInterestRateParity assumes that iA is the interest rate of the currency of country A, iB is the interest rate of the currency of country B, and p is the level of increase or decrease of the spot forward rate. Eventually the following relationship between interest rates and exchange rates will be formed: p=iA−iB The economic implication is that the forward appreciation and discount level of the exchange rate is equal to the difference between the interest rates of the two currencies When the arbitrage rate parity is established, if the interest rate of country A is higher than the interest rate of country B, the forward exchange rate of country A will definitely appreciate and the currency of country A will depreciate in the forward market and vice versa The movement of the exchange rate will offset the difference in interest rates between the two countries, thus making The non-hedging interest rate parity assumes that the investor calculates the expected return based on his or her expectations of future exchange rate movements and carries out investment activities with a certain amount of exchange rate risk Assume that Ep represents the expected forward rate of change in the exchange rate, then Ep=iA−iB whose economic implication is that the expected forward rate of change in the exchange rate is equal to the difference between the interest rates of the two currencies in the non-hedging interest rate parity. When interest rate parity is established, if the interest rate in country A is higher than the interest rate in country B, it means that the market expects the currency of country A to depreciate in the forward period. The doctrine of interest rate parity points out the close relationship between exchange rates and interest rates from the perspective of capital flows, which helps to correctly understand the formation mechanism of exchange rates in the real foreign exchange market and has special practical value. It is not an independent theory of exchange rate determination, and other theories of exchange rate determination are complementary rather than opposed to each other The defects of the theory of interest rate parity are: 1) ignoring the cost of foreign exchange transactions; 2) assuming that there are no barriers to capital flows, in fact, the flow of capital between international will be hindered by factors such as foreign exchange rate controls and underdeveloped foreign exchange markets; 3) assuming that the size of arbitrage capital is infinite, which is difficult to establish in the real world; 4) artificially In the real world, there is a large amount of hot money pursuing the huge excess returns brought by short-term fluctuations in exchange rates. These theories are collectively known as the balance of payments doctrine, and its early form is the international borrowing doctrine. The balance of payments doctrine analyzes how these factors act on the exchange rate through the balance of payments by describing the main factors that affect the balance of payments. It is assumed that Y and Y are the national income of home and foreign countries respectively, P and P are the general price levels of home and foreign countries respectively, i and i are the interest rates of home and foreign countries respectively, e is the exchange rate of home country, and Eef is the expected exchange rate. Assuming that the balance of payments includes only the current account (CA) and the capital and financial account (K), so we have BP=CA+K=0CA is determined by the countrys imports and exports, mainly by Y, Y, P, P, e. Therefore, CA=f1(Y,Y,P,P,e) K is mainly determined by i,i,e,Eef therefore K=f2(i,i,e,Eef) so BP= CA+K=f1(Y,Y,P,P,e)+f2(i,i,e,Eef)=f(Y,Y,P,P,i,i,e,Eef)=0 If all variables other than the exchange rate are considered as exogenous variables already given, the exchange rate will change to a certain level under the combined effect of these factors, thus serving to balance the balance of payments, i.e.: e=g(Y ,Y,P,P,e,e,Eef) The balance of payments theory points out the close relationship that exists between the exchange rate and the balance of payments and facilitates a comprehensive analysis of exchange rate movements and decisions in the short run The balance of payments theory does not provide an in-depth analysis of the relationship between the many variables that affect the balance of payments and their relationship with the exchange rate and concludes that there is a clear causal relationship The balance of payments theory is about the exchange rate In 1973, when the Bretton Woods system collapsed, the fixed exchange rate system collapsed, and the floating exchange rate system was introduced, the theory of exchange rate determination was further developed and the capital market theory became the mainstream of exchange rate theory in the mid to late 1970s. Based on different assumptions about the substitutability of local currency assets and foreign currency assets, the asset market theory is divided into monetary analysis and asset portfolio analysis, which assumes that local currency assets and foreign currency assets are fully substitutable while asset portfolio analysis assumes that they are not fully substitutable. 1) Elastic price monetary analysis assumes that the prices of all commodities are perfectly elastic, so that only the equilibrium of the money market needs to be considered. Conditions MD/P=L(y,i)=kyi, MD=MS and purchasing power parity theory derived from the three it shows that the level of national income, the level of interest rates and the level of money supply between home and foreign countries determine the level of exchange rates through the impact on their respective price levels 2) In 1976, Dornbuseh proposed the viscous price monetary analysis, which is also known as the overshooting model ( overshootingmode1) He argued that the speed of adjustment in the commodity market and the capital market is different, and the price level in the commodity market is characterized by stickiness, which makes purchasing power parity not hold in the short run, and the economy has a transition process from short-run equilibrium to long-run equilibrium In the overshooting model, due to the existence of sticky prices in the commodity market, when the money supply increases at once after 3) In 1977, Branson proposed an asset portfolio analysis approach to exchange rates. Compared with the monetary analysis approach, this theory is characterized by the assumption that local currency assets and foreign currency assets are imperfect substitutes and that factors such as risk make non-hedging interest rate parity untenable, thus requiring a comparison of local currency assets and foreign currency assets The supply and demand equilibrium of local and foreign currency assets is examined in two separate markets Second, the domestic asset stock is introduced directly into the model The domestic asset stock directly governs holdings of various assets, and changes in the current account affect this asset stock In this way, the model combines the flow and stock factors Assume that domestic residents hold three assets, the domestic currency M, domestic government-issued bonds denominated in the domestic currency The total assets of a country are W=M+B+eF. The total assets of a country are distributed among the domestic currency, domestic bonds, and foreign bonds. controlled by the government, and the demand for home country bonds is an increasing function of home interest rates, a decreasing function of foreign interest rates, and an increasing function of total assets From the foreign bond market, the supply of foreign bonds is obtained through the current account surplus, which is also fixed in the short run The demand for foreign bonds is a decreasing function of home interest rates, an increasing function of foreign interest rates, and an increasing function of total assets In the above three markets, different Imbalances in the supply and demand of assets bring about adjustments in the corresponding variables (mainly the domestic interest rate and exchange rate) Only when all three markets are in equilibrium, the countrys asset market as a whole is in equilibrium Thus, in the short run, as the supply of various assets is fixed, the equilibrium of the asset market will determine the level of the domestic interest rate and exchange rate In the long run, for a given supply of money and the supply of domestic bonds, the Therefore, in the long run, the balance of the domestic asset market also requires the current account to be in balance. These theories have their merits, but they also have shortcomings. However, the existing exchange rate decision theories are complementary and alternative to each other, and together they constitute a colorful system of exchange rate decision theories. The new development of exchange rate theory under a floating exchange rate regime is mainly reflected in the application of the latest developments in modern economics to the study of exchange rate decision theory, such as the introduction of expectations, incomplete information, game theory, efficient market theory, GARCH model, behavioral finance and micro market structure theory into the study of exchange rate decision theory