ABSTRACT
In national economies as well as in the world economy, money plays an important role, as a unit of measurement, as a medium of exchange and as a store of value. Money reduces the costs of transactions. Its invention, i.e. the transition from an exchange economy to a money economy, must be interpreted as an important innovation to lower the costs of transaction. In the following, we start with a thought experiment assuming that there is a world money market with only one currency (section 5.1). As a result, some simple conditions can be derived for an equilibrium on the global money market. But in reality this standardized money does not exist and thus the prices of currencies, the exchange rates, play an important role. In the long-run, the exchange rate is likely to follow purchasing power parity (section 5.2), but in the short-run it is determined by interest rate parity (section 5.3). The exchange rate may overshoot in the short-and the medium-run (section 5.4). Expectations are an important factor (section 5.5). Some empirical evidence on purchasing power parity and deviations from it in the short-run is presented (section 5.6).
