Study On The Relationship Between Money Supply And Exchange Rate

Exchange rate theory is one of the most animated discussion topicsin the economic research world. Studying on the main factors whichinfluence exchange rate, how to decide the appropriate exchange rate, andthe arrange of exchange rate flexibility, is the most studied and mostargued field in the western economic academic world. The actualexchange rate of each country's exchange rate is a very sensible problem.There are so many factors you must take considerations when you decidean appropriate exchange rate, for example, interest rate, rationalexpectations, practical purchase ability etc. But most of all, the mostimportant factor is considered as money supply. Because all the factors Ireferred above influence exchange rate indirectly through money supply.Academics have never stopped studying the relationship between moneysupply and exchange rate. This paper's main purpose is to analysis the influence money supplyhas on exchange rate, based on detailed studying of fluctuations of10-year exchange rate of Japan's monetary market after the plaza accord.Lots of scholars believe that money supply influence exchange ratethrough the value money. They use money supply level decide the valueof the money, and then finally decide the exchange rate. But dependingon the study of the fluctuation of money supply and exchange rate during10-year period after plaza accord, the actual interrelationship betweenmoney supply and exchange rate was total different from this traditionaltheory.This paper argues that money supply influence money exchangethrough two aspects. The collaboration of this two aspects decideexchange rate. One aspect, as the traditional theory implied, when moneysupply increases under the circumstances other conditions stayingunchanged, the value of the money would decrease, so when this moneyexchange with other money, the exchange rate would decreasesimultaneously. The other aspect is regarding money as a capital, andfurthermore presumes that people are pursuing money not productionsunder product manufacturing processes. The increase of the moneysupply represent the average rate of return per capital is higher, thatmeans money, as the capital, has more return than ever. From this point of view, money supply increase means return on money is increasing. Sopeople want to have this type of money in order to get more return. As aresult, the exchange rate climbs up too. The reverse is also true thatdecrease of money supply will decrease exchange rate. Therefore whetherexchange rate would go up or down when money supply increased, itdepends which aspect act more powerfully than the other. Is the moneyvalue side plays bigger role than return on capital? If so, exchange ratewill go down. Otherwise, it will go up instead. This paper also argues thateven totally based on the theory of money value, still there is thepossibility that exchange rate won't increase even though money supplyincreased. For example, if the extra money supplied by the increase ofmoney supply goes directly into the stock, and don't be used, then theexchange rate would go up instead of going down.It has a positive sense to research the influence on exchange rate.Because, to the developing country, the solution capital suppliesinsufficiency becomes the most important question which in developingprocess. In various essential factors, the capital short is only the mostimportant restriction factor. Then can obtain the quick economy rate ofrise, only then established in the foundation which the quick moneygrowth. The quick economy rate of rise represents the high capital returns,and then attracts more capital, therefore can enhance this the exchangerate level.