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Market Microstructure Approach - Essay Example
Market microstructure approach is taken as the study of the entire process and outcomes of assets exchange in consideration of the laid down trading rules. It is indeed a drastic move from the traditional exchange rate determination models, which only indicate the long run trends of exchange rate movements thus failing to explain the movements in the short run…
The above factors will therefore be important in answering the discussing whether the market microstructure to exchange rate has been a radical departure from the 1960's, 1970's and 1980's international macroeconomic models. This will involve assessing ach factor against a certain model thus noting the development undergone. For example, the economic growth under the monetary model of the 1960's was slow compared to the economic growth in the recent market microstructure approach. Combining these factors with the market exchange rate expectations will give us the current change value. According to the monetary model argues that relative price levels of any given two countries will provide the determinant to exchange rate. ( Obstfeld, M. and Kenneth, R, 1996)
The real output level in a given country will also be a very important factor in assessing the models development; this is because it directly affects the price levels of certain goods and services. For instance, a rise in the United States output level with the other factors remaining constant will lead to a fall in the average prices in the US this will in return lead to the dollar appreciation. ...