Harvy: A Post Keynesian View of Exchange Rate Determination

HARVEY, JT. 1991. A Post Keynesian view of exchange rate determination. Journal of Post Keynesian Economics 14, no. 1.

There is much out there that has explored exchange rate determination, though not very well. The monetary approach tends not to perform very well. They are not broadly useful models, though they may apply in one situation.

"It is the contention of this author that elements of a theory that can successfully explain the determination of exchange prices under the flexible rate system can be developed from the writings of various Post Keynesian scholars. This paper is intended to provide a rough outline of that approach and to spur further refinement of the model" (61).

"Davidson has emphasized the role of changing expectations in an environment of uncertainty as the key to volatility" (63). "Most important is Schulmeister's contention that those creating the bulk of the demand for foreign exchange are not those needing liquidity for international merchandise trade and investment, but instead the bank trading desks themselves" (63).

There is a distinction between the short-term expectations and the medium-term expectations of investors.