Graduation Year

2016

Date of Submission

4-2016

Document Type

Campus Only Senior Thesis

Degree Name

Bachelor of Arts

Department

Economics

Reader 1

Sven W. Arndt

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Terms of Use for work posted in Scholarship@Claremont.

Rights Information

© 2016 Najeer Kheif D. Ahmed

Abstract

The assertion that financial flows are the primary drivers of exchange rates may be considered as financial markets become increasingly large and sophisticated. However, the Post-Keynesian critique leaves little room for the real economy to impact exchange rates. This paper aims to extend the Mundell-Fleming model to address the Post-Keynesian critique of mainstream models, by incorporating wealth effects, expectations, and Taylor-rule interest targeting. Discussion of significant financial events affecting the USDJPY exchange rate finds that wealth effects are significant considerations, and that the real economy cannot be discounted completely. Empirical results find that the real interest rate is a significant factor in exchange rate determination, tying into the discussion over the relationship between savings and consumption.

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