Economics of Exchanges Rates (F)

Course content

The course is a replacement of International Finance.

This course focuses on issues in international money and finance using both a macroeconomic approach where exchange rates are explained by macroeconomic relationships and a microeconomic approach where exchange rates are determined by the interaction between market participants, for example dealers, corporations and central banks. Key topics include foreign exchange markets, how trades take place in the interbank and the retail segments of the market, exchange rate risk, carry trade, exchange rate determination, central bank interventions, order flows as a determinant of exchange rates, and the effects of news.  

The main theme of this course is to combine theoretical models with empirical testing. Throughout the course, we first present a particular theoretical model and then we turn to the data and test whether the predictions (or assumptions underlying the theory) are consistent with actual behavior.

The course is divided into two modules. In the first module we apply a macroeconomic perspective on exchange rate determination focusing on flexible price and sticky price models as well as portfolio balance models. The empirical support for these models is discussed and we evaluate the models using their forecast performances. Central bank interventions are discussed from both theoretical and empirical perspectives.

The second module focuses on the microeconomic approach where we study the interaction of market participants and how the trading process determines the price of foreign exchange, the microstructure of the foreign exchange market. We will study how and why order flows determine exchange rates. The module also bridges the gap between microstructure and macroeconomic perspectives by analyzing the effects of releases of macroeconomic news on the exchange rate


MSc programme in Economics – elective course

The course is part of the Financial line at the MSc programme in Economics,   symbolized by ‘F’.

Learning outcome

After completion of the course, students should be able to:


  • Describe how the foreign exchange market is organized and how trades take place in the market.
  • Describe the institutional features of the foreign exchange market products (spot and forward contracts) and be able to distinguish between speculation and arbitrage.
  • Describe the types of risks that foreign exchange traders face and how these can be managed.
  • Describe and explain Covered Interest Rate Parity (CIP), Uncovered Interest Rate Parity (UIP), and Purchasing Power Parity (PPP) and be able to summarize the empirical evidence on international interest these parity conditions.
  • Describe and explain how macro data releases affect exchange rates and summarize the empirical evidence.



  • Describe the main models of exchange rate determination (the Monetary approach to the exchange rate, Dornbusch overshooting model, the portfolio balance model and Lucas asset pricing model) and apply these models to analyze the effects of monetary and fiscal policy on the exchange rate, and summarize the empirical evidence on these models.
  • Describe and apply Mundell-Fleming models to analyze the effects of economic policy under both flexible and fixed exchange rates.
  • Describe and apply microstructure based models to analyze price determination on the foreign exchange market and summarize the empirical evidence on these models.
  • Describe the channels by which central bank intervention can affect the exchange rate and summarize the empirical evidence on these channels.
  • Describe, explain and apply investment strategies based on international parity conditions.



  • Process relevant information for the analysis of the foreign exchange market.
  • Carry out economic analysis related to exchange rate determination, forecasting and international financial management.



Pilbeam K., (2013), International Finance, Palgrave Macmillan, fourth edition.

Sarno L. and M.P. Taylor, (2002), The Economics of Exchange Rates, Cambridge University Press.

Journal articles

Total number of pages: 450

Prior to enrolling in this course, students should have taken at least second year microeconomics and macroeconomics. It is recommended to have followed Corporate Finance and Incentives and Econometrics II. The course requires a good grasp of econometrics and mathematics.

2 hours lectures 1 to 2 times a week from week 6 to 20 (except holidays).

The overall schema for the Master can be seen at

Timetable and venue:
To see the time and location of lectures and please press the link/links under "Se skema" (See schedule) at the right side of this page (E means Autumn, F means Spring)

You can find the similar information partly in English at
-Select Department: “2200-Økonomisk Institut” (and wait for respond)
-Select Module:: “2200-F18; [Name of course]”
-Select Report Type: “List – Weekdays”
-Select Period: “Forår/Spring – Week 5-30”
Press: “ View Timetable”

7,5 ECTS
Type of assessment
Written examination, 3 hours under invigilation
at the computers of the university. The exam assignment is given in English and must be answered in English.
Without aids
Marking scale
7-point grading scale
Censorship form
No external censorship
The course can be selected for external assessment.
Criteria for exam assessment

Students are assessed on the extent to which they master the learning outcome for the course.

To receive the top grade, the student must with no or only a few minor weaknesses be able to demonstrate an excellent performance displaying a high level of command of all aspects of the relevant material and can make use of the knowledge, skills and competencies listed in the learning outcomes.

Single subject courses (day)

  • Category
  • Hours
  • Lectures
  • 42
  • Preparation
  • 161
  • Exam
  • 3
  • English
  • 206