Factors affecting the exchange rate

Based on the theory of PPPs, it is possible to predict changes in the nominal exchange rate in the long term, when the economy is at the level of potential output, and prices are flexible.

The exchange rate, as a price, deviates from the value basis (purchasing power of currencies) under the influence of supply and demand. The ratio of such supply and demand depends on a number of factors. The multifactorial nature of the exchange rate reflects its relationship with other economic categories – value, price, money, interest, balance of payments, etc. At the same time, there is a difficult interweaving, interdependence and transformation of these factors, i.e. putting forward as decisive one or the other factors. The main factors causing short-term exchange rate fluctuations are: a change in the level of aggregate output due to growth or falling aggregate demand, differences in the level of interest rates in different countries, the state of the current account balance, expectations of economic agents regarding future changes in the exchange rate, election campaigns, etc.