A Comparison of the Current Account and the Monetary Theories of Exchange Rate Determination

Abstract

In this study, we develop a way to test for the two theories, the Monetary and the current account, in explaining exchange rate determination. The approach we develop has two components to it. The first is a test of the appropriate signs. That is, the two theories disagree on the signs of the determining variables. Thus, depending on the sign of the regressors, we can prove the one, or the other. The second sub test is one which has to do with the speed of adjustment. Specifically, importance should be depicted in a quicker speed of adjustment. On that issue, if real(monetary) variables adjust faster, then it supports the traditional (monetary) view.