ABSTRACT
As their title suggests, international monetary models (IMM) deal primarily with the relationship between monetary variables (such as money supply and interest rates) and the spot exchange rate. With the increasing importance of capital flows in the 1970s, stimulated in part by Organisation of Petroleum Exporting Countries (OPEC) balances after the 1973 oil crisis, the emphasis switched from viewing the exchange rate as the 'price' which equilibrated the net.flows of currency generated by trade in goods, to an 'asset view' of exchange rate determination. The equilibrium spot rate is then viewed as that rate at which asset holders do not wish to alter their portfolio of domestic and foreign assets. 'International monetary models' simplify the complex problem of portfolio choice. In the current account monetary models (CAM) onlr one asset, 'money', is included in the analysis. In the capital account monetary models (KAM) it is often assumed that domestic and foreign bonds are perfect substitutes. These 'simplified models' of asset behaviour provide an introduction to the analysis pursued in Chapters 11 and 12, where agents hold diversified portfolios with many assets which also interact with expenditure decisions. However the two broad types of international monetary models presented here are of interest in their own right since they ·provide useful and tractable methods of analysing movements in the spot rate. Indeed the CAM and KAM models provide the basic ideas behind equations and models used in practical exchange rate forecasting which are discussed in the final section of the book.
