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LITERATURE REVIEW

2.1 REVIEW OF THEORETICAL LITERATURE

The importance of exchange rate policies in economic adjustments cannot be overemphasized as it has become the subject of considerable debate in many economies in the word today.

Several economists in the world today have discovered that in the bid to achieve certain objectives, that are economy wide in nature, the issue of exchange rate cannot be handled lightly. They try to see if exchange rate instabilities affect other macroeconomic aggregates positively or negatively over time.

Efforts have also been made to see if the economic problems of the Less Developed Countries (LDCs) could be tackled employing exchanging ate policy as a vital instrument. To this end, several exchange rate models were propounded by different economies in the world to suggest how exchange rate could, in the first place, be determined.

2.2  EXCHANGE RATE DERMINIATION MODELS

exchange rate determination has been a crucial issue in economic research. As a result, several schools of though propounded different ways by which exchange ate could be determined. Before the 1970’s the Keynesian model, which was developed by James Meode (1951), dominated the scene. In 1962 and 1963, it was amended by Marcus Fleming and Robert Murdell respectively to be known as the Mudell-Fleming model. However during the 1970s, other exchange rate models, which were based on considerations of stock equilibrium in the financial market internationally, were developed.