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Original Article

Ekonomik Yaklasim. 2017; 28(103): 81-118

The Microstructure Approach to Exchange Rates

Erol Bulut.

Before the 1980s, the dominant approaches to exchange rate determination were the goods market and the asset market approach assuming agents in the market are identical, information is perfect, trading is costless and trading mechanisms are inconsequential. Yet the recent literature on the foreign exchange market has proved that exchange rates deviate from the economic fundamentals. Moreover, this literature is concerned with “micro” aspects of the foreign exchange market, such as the transmission of information among market participants, the behavior of market agents, the importance of order flow, the heterogeneity for trading volume and exchange rate volatility. The purpose of this study is to examine the role of the microstructure approach by comparing micro and macro models in exchange rate determination.

Key words: Foreign exchange economics, international financial markets, microstructure, monetary systems, international finance markets. JEL Codes: F31, G15, D01.

Article Language: Turkish English

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