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Economic Theory of Bank Credit$
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L. Albert Hahn

Print publication date: 2015

Print ISBN-13: 9780198723073

Published to Oxford Scholarship Online: November 2015

DOI: 10.1093/acprof:oso/9780198723073.001.0001

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Credit and Foreign Currency

Credit and Foreign Currency

(p.132) (p.133) [3.]B. Credit and Foreign Currency
Economic Theory of Bank Credit

L. Albert Hahn

Oxford University Press

The classical view is that exchange rates are determined by the price ratio of traded goods. Demand for (supply of) a foreign currency is a function of the price differential an importer (exporter) faces. The exchange rate required to profitably import a certain good is the mirror image of the exchange rate required to profitably export the same good. Therefore, there will be a good such that both importer and exporter can only trade without making profit. This will determine both exchange rate and trade volume. Credit expansion increases prices, narrowing all price differentials and therefore lowering exchange rate and trade volume.

Keywords:   exchange rate, international trade, credit expansion, goods traded internationally

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