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86 CHAPTER 3. THE MONETARY MODELexchange rate are embodied in the current exchange rate. High relativemoney growth at home leads to a weakening of the home currencywhile high relative income growth leads to a strengthening of the homecurrency.Next, advance time by one period in (3.9) to gets t+1 = γf t+1 +ψE t+1 s t+2 . Take expectations conditional on time t informationand use the law of iterated expectations to getE t s t+1 = γE t f t+1 + ψE t s t+2 and substitute back into (3.9). Now dothis again for s t+2 ,s t+3 ,...,s t+k ,andyougets t = γkXj=0(ψ) j E t f t+j +(ψ) k+1 E t s t+k+1 . (3.10)Eventually, you’ll want to drive k →∞butindoingsoyouneedtospecify the behavior the term (ψ) k E t s t+k .The fundamentals (no bubbles) solution. Since ψ < 1, you obtain theunique fundamentals (no bubbles) solution by restricting the rate atwhich the exchange rate grows by imposing the transversality conditionlimk→∞ (ψ)k E t s t+k =0, (3.11)which limits the rate at which the exchange rate can grow asymptotically.If the transversality condition holds, let k →∞in (3.10) to getthe present-value formulas t = γ∞Xj=0(ψ) j E t f t+j (3.12)The exchange rate is the discounted present value of expected futurevalues of the fundamentals. In Þnance, the present value model is apopular theory of asset pricing. There, s is the stock price and f is theÞrm’s dividends. Since the exchange rate is given by the same basicformula as stock prices, the monetary approach is sometimes referredto as the ‘asset’ approach to the exchange rate. According to thisapproach, we should expect the exchange rate to behave just like theprices of other assets such as stocks and bonds. From this perspectiveit will come as no surprise that the exchange rate more volatile than