Timeline for What determines the exchange rate of two fiat currencies if the supply of each is known?
Current License: CC BY-SA 3.0
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| Jun 17, 2020 at 9:40 | history | edited | CommunityBot |
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| May 22, 2015 at 5:03 | history | edited | Keshav Srinivasan | CC BY-SA 3.0 |
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| May 13, 2015 at 18:33 | answer | added | VicAche | timeline score: 0 | |
| May 9, 2015 at 1:46 | answer | added | nominally rigid | timeline score: 2 | |
| May 8, 2015 at 19:21 | history | edited | Keshav Srinivasan | CC BY-SA 3.0 |
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| May 8, 2015 at 0:16 | answer | added | Alecos Papadopoulos | timeline score: -4 | |
| May 7, 2015 at 12:57 | comment | added | FooBar | I think you guys should have moved this discussion to chat quite some time ago ;) | |
| May 7, 2015 at 4:23 | comment | added | Keshav Srinivasan | @Hessian Well, is $P = M/D$ a true or false statement if we assume the quantity theory of money? | |
| May 7, 2015 at 4:21 | comment | added | Hessian | @KeshavSrinivasan I don't really have the time to explain producer theory but I assure you that all of what I mentioned is relevant for price levels as well as relative prices. If you want to learn more id refer you to Nicholson or Varian's intermediate micro books. | |
| May 7, 2015 at 4:18 | comment | added | Keshav Srinivasan | @Hessian Well, doesn't the stuff you're talking about just constitute the determinants of relative prices? Why does that affect the price level? | |
| May 7, 2015 at 4:12 | comment | added | RegressForward | Whichever has the most frictions would determine the other, no? One of these, in a practical sense would be more resistant to change on the aggregate. There would then be regional exceptions where that direction would be reversed because the frictions likely have non-uniform distributions. | |
| May 7, 2015 at 3:43 | comment | added | Hessian | @KeshavSrinivasan Why would this be how prices are determined? So you can grasp why this is so absurd, consider that determining prices in this manner would COMPLETELY ignore the cost of producing the goods in the index, the market structure, etc.You really CAN'T do these kinds of things with what is only an identity. | |
| May 7, 2015 at 3:40 | comment | added | Keshav Srinivasan | @Hessian Well, if we eliminated the second currency, wouldn't the price level just equal $M/D$? So it's the introduction of the second currency that's preventing us from determining the price level. | |
| May 7, 2015 at 3:32 | comment | added | Hessian | @KeshavSrinivasan I emphasize that it's not the best approach since it's an accounting identity, and certainly wasn't developed with exchange rate determination in mind. Probably best to go with (a) something micro-founded/structural and (b) something with a sense of a supply side for determining prices. | |
| May 7, 2015 at 3:22 | comment | added | Hessian | @KeshavSrinivasan Well first off, I wouldn't start off by "assuming" QTM. It's just straight up not the way to think about exchange rates. IMHO, it's best to think about exchange rates from a PPP/LOP perspective. Of course his setup doesn't determine the price level, there are no supply side economics involved, so I'm not sure why he expects it to be determined in the first place. He could easily determine the exchange rate assuming everything else is exogenously given -> 1 unknown in 1 equation. Again, QTM is not the best way to approach it, whether it's assumed or not. | |
| May 7, 2015 at 3:05 | comment | added | Keshav Srinivasan | @dismalscience Consider it as a theoretical question then, rather than a question about whether existing currencies are perfect substitutes for dollars in the US, | |
| May 7, 2015 at 3:05 | comment | added | Keshav Srinivasan | @Hessian Well, if we assume the quantity theory of money, then what would the answer to Landsburg's problem be? | |
| May 7, 2015 at 2:54 | comment | added | dismalscience | The premise is a bit absurd, then. No currency is a perfect substitute for dollars (this is generally true of fiat currencies). Try paying US taxes in another currency, or settling any USD contract in another currency. Both are impossible. To do business in a currency other than the one in which one's obligations are owed is to accept foreign exchange risk. | |
| May 7, 2015 at 2:39 | comment | added | Hessian | In addition, I'm not sure that applying quantity theory of money is the best way of thinking about the demand for money. Usually there are two ways of generating "demand" for currencies in economics models, and neither uses quantity theory: cash in advance (agents have to "visit the ATM" before consumption) and money in utility models (where you derive satisfaction from holding currency by utility being a function of both consumption and the stock of money being held.) | |
| May 7, 2015 at 2:35 | comment | added | Hessian | @ Wouldn't the nominal exchange rate just "move around" the real rate like any other currency? Meaning that since real rates are determined by relative prices, the nominal rate would reflect changes in these relative prices as well as other factors. | |
| May 7, 2015 at 2:24 | comment | added | Keshav Srinivasan | @dismalscience Well, Landsburg's question isn't something specific to cryptocurrencies. It's just a general question about any currency that is a perfect substitute for dollars. | |
| May 7, 2015 at 2:20 | comment | added | dismalscience | The current title is a little confusing; a cryptocurrency isn't really a fiat currency. I would suggest that the answer has everything to do with frictional holdings of the cryptocurrency— the equilibrium value of the cryptocurrency will be very low, and the exchange brokers will profit off their holdings through the spread on the exchange rate. The cryptocurrency will, in effect, be a transaction technology, not full-fledged money in and of itself. | |
| May 7, 2015 at 2:05 | history | asked | Keshav Srinivasan | CC BY-SA 3.0 |