The Economics Of Foreign Exchange

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A pioneering exploration of the relevance of economic theory to the practical realities of the foreign exchange market, this volume presents a well-reasoned, comprehensive examination of the degree to which economic theories and forecasts are helpful in predicting exchange rates. Douch, an economist who has worked closely with the foreign exchange market, argues that theoretical economic models have exhibited some serious inadequacies in forecasting the future.

In an attempt to determine the real predictive value of economic theory in this context, Douch examines each of the different economic approaches in-depth and then analyzes the actual workings of the foreign exchange market from the perspective of the market participants. Particular emphasis is placed upon the reasons for the observed failure of economic theory to reliably predict exchange rate movements over time.

Divided into three major sections, the book begins with five chapters that describe and evaluate the different economic approaches to explaining exchange rate movements. The next two chapters link the theories of the first section with the practical realities of the third by discussing the advantages of fixed and floating exchange rates and presenting a brief history of exchange rate regimes since World War II.

In the final section, Douch first looks at how the spot and forward exchange rate markets actually work by examining the motives of market participants. Subsequent chapters explore such issues as whether Game Theory might be used to explain market actions, the effect of new foreign exchange hedging instruments on the market, and the contribution of Chart Analysis to exchange rate forecasts.

A detailed appendix defines various economic indicators and seeks to explain how the market might react to them and why. Advanced students of economics as well as foreign exchange market participants with little economic training will find here important new insights into when economic theories can be helpful in predicting exchange rates--and, even more importantly, when they can not.

Review: ?Presents a practical guide to the economics of foreign exchange, comparing and contrasting the theoretical economics of foreign exchange movements with the practical realities of exchange rate markets. Examines five theories of exchange rate movements: purchasing power parity; the balance of payments approach; the asset market approach; the monetary approach; and rational expectations and the forward market.

Examines the advantages and disadvantages of fixed and floating exchange rates. Reviews the history of the foreign exchange market since Bretton Woods. Describes the operation of the spot and foreign exchange markets. Examines the ways in which game theory might be used to explain the market and explores the effect of new foreign exchange hedging instruments on the market.

Discusses technical or chart analysis and explains the usefullness of economic forecasting of exchange rates. Douch is Senior Manager of Global Treasury Services, London, for Barclays Bank, PLC. Index.?-Journal of Economic Literature