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rate determination. Since the task of exchange rate theory is to explain be- havior observed in the real world, the essay begins (in sec. 1.2) with a summary of empirical regularities that have been characteristic of the behav- ior of exchange rates and other related variables during periods of floating exchange rates. The starting point is the theory of exchange rate from purchasing power parity (PPP), which is also called the inflation theory of exchange rates. PPP can be traced back to Spain in the early sixteenth century and seventeencentury England, but the Swedish economist Cassel (1918) was the first name of the theory of PPP. Before discussing the economic literature on the relationship between interest rates and exchange rates in full, it will be useful to briefly discuss some of the important theories of exchange rate determination. There are many theories such as the theory of Purchasing Power Purchase Agreement (PPP

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