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modern monetary theories

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One of the modern monetary theories states that exchange rate
volatility is triggered by a one-time domestic money supply increase, because
this is assumed to raise expectations of higher future monetary growth.
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The purchasing power parity theory is extended to include the capital
markets. If, in both countries whose currencies are exchanged, the demand


for money is determined by the level of domestic income and domestic
interest rates, then a higher income increases demand for transactions
balances while a higher interest rate increases the opportunity cost of holding
money, reducing the demand for money.

Under a second approach, the exchange rate adjusts instantaneously to
maintain continuous interest rate parity, but only in the long run to maintain
PPP.

Volatility occurs because the commodity markets adjust more slowly
than the financial markets. This version is known as the dynamic monetary
approach.


Synthesis of Traditional and Modern Monetary Views
In order to better suit the previous theories to the realities of the
market, some of the more stringent conditions were adjusted into a synthesis
of the traditional and modern monetary theories.

A short-term capital outflow induced by a monetary shock creates a
payments imbalance that requires an exchange rate change to maintain
balance of payments equilibrium. Speculative forces, commodity markets
disturbances, and the existence of short-term capital mobility trigger the
exchange rate volatility. The degree of change in the exchange rate is a
function of consumers' elasticity of demand.افضل شركات التداول عبر الانترنت
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