Dennis H. Robertson And The Monetary Approach To Exchange Rates

Prominent among competing explanations of exchange rate determination in a regime of floating exchange rates is the so-called monetary approach, which holds that the exchange rate between two national currencies is determined by current and prospective relative supplies of and demands for those national money stocks. This theory has a long tradition going back more than 300 years. As an integral part of pre-Keynesian international monetary theory, it formed the central analytical core of classical and neoclassical explanations of exchange rate behaviour. Although it was temporarily eclipsed by the rival elasticities and foreign trade multiplier or income-expenditure approaches that gained popularity with the domination of the Keynesian revolution, it has recently made a comeback and today is widely employed by academic and business economists to explain the behaviour of exchange rates in the post-Bretton Woods era of generalized floating. For example, such well-known economists as Robert Barro, John Bilson, Jacob Frenkel, and Michael Mussa1 have successfully employed the monetary approach to account for recent exchange rate experience, as have analysts at Citibank, Chase Manhattan, and other financial instituttions. Finally, it is worth noting that certain segments of the financial press, notably the editorial pages of the Wall Street Journal, regularly espouse the monetary approach.