About 4 years ago, I asked Lore Aguilar how exchange rates were determined. We were talking about them abstractly, but I wanted to know more. For those of you that were in that macroeconomics course taught by Matt DelSanto, you may remember the class was not too hard and our classmates were not too intelligent. Although, I must admit that the final was tough and took a looong time.
Now, 4 years later, I am finally starting to learn how this whole crazy financial system works. While I am just scratching the surface, I understand why that TA 4 years ago denied me a proper answer. Maybe, 7 weeks from now, when I have a full model at my fingertips, I will try and lay it out here.
Let’s just say for now that domestic interest rates, foreign interest rates, current exchange rates, expectations of future exchange rates, and money demand all play a role.
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