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Exchange Rate Equilibrium – The Thermodynamics Approach

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  • S. Prabakaran

Abstract

A thermodynamic analogy in economics is older than the idea of von Neumann to look for market entropy in liquidity, advice that was not taken in any thermodynamic analogy presented so far in the literature. Many researchers have attempted to viaduct their fields with others to gain insight into their own. In the past decade or so, physicists have begun to do academic research in economics. Perhaps people are now actively involved in an emerging field often called Econophysics. In this paper we attempt to introduce a thermodynamics approach to exchange rate equilibrium. The main ambition of this study is fourfold: 1) First we begin our description of a thermodynamics model of economics with the simplest example. 2) To expand shown how to construct a mathematical theory of exchange rate equilibrium without the notion of utility. 3) Next we derived the equation for exchange rate market with respect to time in an equilibrium state by using some solid evidence 4) Finally we construct the economic model with the actual exchange market at constant temperature. And this paper end with conclusion.

Suggested Citation

  • S. Prabakaran, 2014. "Exchange Rate Equilibrium – The Thermodynamics Approach," International Journal of Financial Economics, Research Academy of Social Sciences, vol. 3(1), pages 11-24.
    • Handle: RePEc:rss:jnljfe:v3i1p2
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    References listed on IDEAS

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    1. Plerou, Vasiliki & Gopikrishnan, Parameswaran & Rosenow, Bernd & Amaral, Luis A.N. & Stanley, H.Eugene, 2000. "Econophysics: financial time series from a statistical physics point of view," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 279(1), pages 443-456.
    2. Mr. Peter Isard, 2007. "Equilibrium Exchange Rates: Assessment Methodologies," IMF Working Papers 2007/296, International Monetary Fund.
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