Money, Banking, and the Determination of Real and Nominal Exchange Rates

Caroline Betts and Bruce Smith

International Economic Review, 1997, vol. 38, issue 3, 703-34

Abstract: The authors consider a model where spatial separation, limited communication, and stochastic relocation create a role for banks and country-specific currencies. The same factors also permit a deviation from the law of one price. The authors examine how monetary policies influence real and nominal rates of exchange and real and nominal rates of interest under both fixed and flexible exchange rate regimes. They also demonstrate that both regimes are characterized by an indeterminacy of both the real and the nominal rate of exchange. Copyright 1997 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Date: 1997
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