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What is Exchange Rate Model with Currency Substitution about?

1) The document presents a model of exchange rate determination for a small open economy that allows for currency substitution and rational expectations. 2) Residents are assumed to hold both domestic and foreign currency based on expected returns. Exchange rates are determined by demand and supply in markets for traded and home goods. 3) The model derives an expression for the rate of change in the real exchange rate as a function of the expected difference in returns to domestic and foreign currencies,

Author

1klorna

Language

EN