International Finance Essay Example | Topics and Well Written Essays - 1500 words - 6

International Finance - Essay ExampleIn youthful years, there has been a voluminous expansion of asset-market view of exchange rates (Adolfson, 2014, p. 35).Its popularity lies in the realism of its distinguishing conjectural assumption and its distinguishing empirical implication. The exchange rate essential adjust instantly to equilibrate the international demand for stocks of national assets instead of adjusting to equilibrate the international demand for flows of national goods as if it was in the traditional view. That is the theoretical assumption. The empirical implication is that floating exchange rates will display high variability. The paper tries to scrutinize the flexible price monetary model as a model of determining exchange rates and the results of empirical tests and studies done on it.The flexible price monetary model of exchange rate stopping point has been developed by Frenkel, Mussa, Girton and Roper(1977), Hodrick(1978) and Bilson (1980).Since it is an exampl e of a monetary approach, the assumption is that there no barriers (such as transaction costs or capital controls) that might particle international capital markets. The domestic help and foreign bonds are also perfect substitutes in investor demand functions (Gertler, 2014, p. 25). Thus, there is only one bond in the world. In the flexible price monetary model sub-branch of the monetary approach, there is also an assumption of goods markets. That is, apart from there being no barriers that segment international goods markets, domestic and foreign goods are also perfect substitutes in consumer demand functions. In essence, only one good exists in the world. This specific assumption implies Purchasing military group parity (PPP) that is the domestic price level is equal to the foreign price level multiplies by the exchange rates. According to this exchange rate, the relative price of the notes is determined by the supply and demand for