Economics of Exchanges Rates (F)

Course content

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 a broad set of new economic information.


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 completing the course the student is expected to be able to:



  • Account for how the foreign exchange market is organized and refect on 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.
  • Reflect on the types of risks that foreign exchange traders face and explaine how these can be accounted for.
  • 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 the main models of exchange rate determination (the Mundell-Fleming mode, the Monetary approach to the exchange rate, Dornbusch overshooting model, the portfolio balance model and Lucas asset pricing model) and summarize the empirical evidence on these models.
  • Account for how macro data releases affect exchange rates and summarize the empirical evidence.
  • Identify and describe the channels by which central bank intervention can affect the exchange rate and summarize the empirical evidence on these channels.



  • Master and apply the main models of exchange rate determination to analyze the effects of monetary and fiscal policy on the exchange rate,
  • Master and apply microstructure based models to analyze price determination on the foreign exchange market.
  • Assess and apply investment strategies based on international parity conditions.



  • Plan and process relevant information for the analysis of the foreign exchange market.
  • Manage and carry out economic analysis related to exchange rate determination, forecasting and international financial management. in new unpredictable situations.



In case of a pandemic like Corona the teaching in this course may be changed to be taught either fully or partly online. For further information, see the course room on Absalon.


  • 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

It is recommended to have a background in finance and econometrics equivalent to Corporate Finance and Incentives. The course requires a good grasp of both 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 KUnet:
MSc in Economics => "courses and teaching" => "Planning and overview" => "Your timetable"
KA i Økonomi => "Kurser og undervisning" => "Planlægning og overblik" => "Dit skema"

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

You can find the similar information in English at
-Select Department: “2200-Økonomisk Institut” (and wait for respond)
-Select Module:: “2200-F21; [Name of course]”
-Select Report Type: “List – Weekdays”
-Select Period: “Forår/Spring – Week 5-30”
Press: “ View Timetable”



Feedback is obtained throughout the course in the following ways: (a) the lecturer answering questions in class or in direct connection to lectures; (b) written feedback to each student on submitted homework assignments; (c) individual meetings between lecturer and student during office hours (TBA).

7,5 ECTS
Type of assessment
Written examination, 3 hours under invigilation
in the exam venues of the university.

The exam assignment is given in English and must be answered in English.

In the event that this summer's exams have to be conducted as online exams due to COVID-19, the exam form will be a 3 H take-home exam with aids. The reexam will be the same as the rescheduled ordinary exam, but possibly online orally if only few students register.
Without aids

for the written exam.


In case of an oral reexam, please go to the section "Reexam" for further information about allowed aids.


Marking scale
7-point grading scale
Censorship form
No external censorship
for the written exam. The exam may be chosen for external censorship by random check.
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.


The student should be able to independently analyze movements in actual exchange rates using economic theories discussed during the course. This includes the analysis of extended theoretical models covered in the course.

Single subject courses (day)

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