Because of continuing capital controls in the core countries during the immediate postwar period, the action in international monetary economics was initially mainly in the periphery, where the new IMF played a leading role. As the market system recovered, academic economics began to take an interest, with Robert Mundell (among others) working to extend the economists’ preferred macroeconomic modelling framework (the so-called IS–LM), to include the balance of payments. In time, the logical endpoint of these academic efforts was revival of the empirically discredited specie-flow model by Harry Johnson and others. Kindleberger’s practitioner wisdom resisted all these academic developments as distraction from real world financial developments.

This chapter provides an introduction to flexible exchange rates. It presents both a simple supply and demand model of exchange rate determination and the assets-based approach of the interest rate parity condition. It considers the role of interest rates and expectations in exchange rate determination. An appendix analyzes monetary policies and the nominal exchange rate.