AN ALTERNATIVE THEORY FOR EXCHANGE RATE DETERMINATION

Abstract

Why should fiat money have some value? This is one of those puzzles that economic theorists pose for themselves. Even more mysterious is the relative value (exchange rate) between fiat moneys, none of which has intrinsic value. Since money is a creature of governments, it is not surprising to find some kind of regulation to make it work. My proposal determines the relative value (exchange rate) between fiat moneys based on the currency value concept formulated by Rudolf Hilferding (1981). The currency value is then defined as the ratio between the Gross Domestic product (GDP) and the number of working hours spent to produce it. The exchange rate is defined as the ratio of the currency values between two countries. The novelty of this viewpoint is that prices and productivity are explicitely present in the model, contrary to the theory of the purchasing power parity (PPP), where productivity is included in the prices.