The Monetary Approach to Exchange Rates: A Brief Review and Empirical Investigation of Debt, Deficit, and Debt Management: Evidence from the United States

This paper reviews the monetary approach to exchange rate determination and gives a brief historical review on the demand for money used in this approach. The monetary approach to exchange rate determination has come a long way. The basic models developed in the 1970s received initial support but did not hold up under further empirical research. With several advances in econometric analysis and improved research design, subsequent studies began to rebuild support for the model at least as a long-run phenomenon. A shortcoming of the monetary approach to exchange rate determination so far in the literature is the effect of fiscal variables, as well as regime changes, on the demand for money. The paper provides some empirical evidence in support of this claim. Future research should use a more comprehensive demand for money in the exchange rate determination.