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Although they can prove lucrative for short-term players able to get in and out of positions quickly, they fly in the face of basic interest rate theory.
The rate theory has two major shortcomings.
A typical rate theory model consists of three coupled ordinary differential equations (Eqs.
The latter case corresponds to the famous rate theory description of void growth.
The evaporation kinetics can be modeled by Statistical Rate Theory (SRT).
One can, however, to some extent account for the latter in the rate theory models by replacing the diffusion-controlled growth equation in the rate theory (Eq. (1.2)) by a general growth equation as Eq. (98.2).
The difficulty economists have faced in finding an empirically successful exchange rate theory is well documented (Taylor 1995).
Moreover, in the low driving forces limit (coarsening stage) they are equivalent to the rate theory models.
Now we show how the coarsening limit of model B just discussed reduces to the famous rate theory approximation.
It is obvious that sharp- and diffuse-interface models are able to relax all the assumptions of the rate theory.
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It was never intended as a precise predictor of currency movements, but as a tool to make exchange-rate theory more digestible.
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