2.2 Implications for the Exchange Rate
Our model so far has dealt exclusively with the effect of a loss of confidence on the value
of a single firm. Aggregating similar firms to create an economy-wide collapse of firms’ values
is straightforward. We can also reasonably assume that foreign investors and many domestic
investors care about returns in dollars. We then have the result that a fall in R, which is now a
loss of confidence about returns in dollars, can trigger a fall in firms’ values in dollars