國(guó)際經(jīng)濟(jì)學(xué)基礎(chǔ)chapter12.ppt

1、Exchange Rate Determination,9,Chapter Objective: Reviews PPP and understands Examines MABP and exchange rate determination. Understands portfolio balance approach Knows exchange rate overshooting,Exchange Rate Determination,PPP,IRP,Monetary approach,Ms , Md,Exchange rate and BP,portfolio balance app

2、roach,asset,Different Exchange rate system,Elasticity Sticky,Chapter Three Outline,1.Purchasing Power Parity 2.Monetary Approach to the Balance of payments and Exchange Rate Determination 3. Exchange Rate Dynamics 4. Asset Market model and Exchange Rates.Portfolio-Balance Approach Exchange Rate Over

3、shooting,1. Purchasing Power Parity,(1)A law of one price (2)Absolute and relative PPP (3) PPP Deviations and Evidence on it (4) Empirical tests of Purchasing Power Parity,(1) Absolute and relative PPP,Law of one price The exchange rate between two currencies should equal the ratio of the countries

4、price levels. Relative PPP states that the rate of change in an exchange rate is equal to the differences in the rates of inflation. If U.S. inflation is 5% and U.K. inflation is 8%, the pound should depreciate by 3%.,(2)Evidence on PPP,PPP probably doesnt hold precisely in the real world for a vari

5、ety of reasons. Haircuts cost 10 times as much in the developed world as in the developing world. Film, on the other hand, is a highly standardized commodity that is actively traded across borders. Shipping costs, as well as tariffs and quotas can lead to deviations from PPP. PPP-determined exchange

6、 rates still provide a valuable benchmark.,PPP GDP 2007 (millions of dollars) 1 United States 13,811,200 2 China 7,055,079 3 Japan 4,283,529 4 India 3,092,126 5 Germany 2,727,514 6 Russian Federation 2,088,207 7 France 2,061,884 8 United Kingdom 2,046,780 9 Brazil 1,833,601 10 Italy 1,777,353 11 Spa

7、in 1,405,262 12 Mexico 1,345,530 13 Korea, Rep. 1,199,270 14 Canada 1,178,205 15 Turkey 922,189,Total GDP 2007 (millions of US dollars) 1 United States 13,811,200 2 Japan 4,376,705 3 Germany 3,297,233 4 China 3,280,053 5 United Kingdom 2,727,806 6 France 2,562,288 a 7 Italy 2,107,481 8 Spain 1,429,2

8、26 9 Canada 1,326,376 10 Brazil 1,314,170 11 Russian Federation 1,291,011 12 India 1,170,968 13 Korea, Rep. 969,795 14 Mexico 893,364 15 Australia 821,716,(3) Empirical tests of Purchasing Power Parity,2 Interest Rate Parity Theory,3 Flexible-Price Monetary Model,4.Asset Market model and Exchange Ra

9、tes,(1)Asset market model (2)Extended asset market model (3) Portfolio Balance Approach,(1)Asset market model,Asset market model(PB) differs from the monetary approach(MA) Perfect capital flow(MA, PB) Perfect substitutes(uncovered interest arbitrage and no foreign exchange risk premium(MA),(1)Asset

10、market model,W=M+D+F M:domestic currency (transactions) D:domestic bonds (return it yields) F:foreign bonds (return and spreading risks) A change in any of underlying factors will achieves a new portfolio; An increase in wealth increases the demand for these three assets.,(1)Asset market model,Accor

11、ding to asset market approach ,equilibrium in each financial market occurs when the quantity demanded of each financial asset equals its supply. The exchange rate is determined in the process of reaching equilibrium in each financial market.,(2) Extended asset market model,(2) Extended asset market

12、model,Domestic currency equilibrium,i,R,M,increase,D,F,M,R,i,(2) Extended asset market model,foreign bonds,Domestic bonds,R,i,D,increase,increase,F,R,i,(3) Portfolio Balance Approach,open market purchase,E,E,R,i,M increases, Enew equilibrium Domestic currency depreciates Interest decreases,M,F,M,D,F

13、,(3) Portfolio Balance Approach,(BCA surplus),M,D,F,F,D,M,E,R,i,E,Domestic currency appreciates Save foreign currency to change M More foreign currency supply F depreciates i* increases If i unchanged, wealth unchanged,4.Exchange Rate Dynamics,Exchange Rate Overshooting (sticky price),5.Exchange Rat

14、e Overshooting,1)concept Stock adjustments in financial assets are much larger and quicker to occur than in trade flows.in the short run ,changes in R are likely to reflect the effect of stock adjustments in financial assets and expectations.but in the long run ,adjustments in trade flows occurs. Th

15、e immediate flows of financial investment leads to an immediate depreciation of home currency which exceeds or overshoots the expected in the long run according to PPP.,2)Sequence : the money supply increases,the interest rate falls,capital flows out, leads to an immediate depreciation of the home c

16、urrency. In the long run the home currencys prices rice and it appreciates to eliminate the overshooting.,5.Exchange Rate Overshooting,3)model Regarding a higher trade deficit for the domestic country, the spot exchange rate will jump immediately above E0 R1 R0 until the new long run equilibrium E1

17、is reached. After a disturbance, the exchange rate may not move in such an orderly fashion.,4.Exchange Rate Overshooting,t,R,PPP doesnt hold well under flexible exchange rate. Exchange rates exhibit much more volatile behavior than prices do. In the short run, following some disturbance to equilibri

18、um, prices will adjust slowly to the new equilibrium level, but the exchange rates and interest rates will adjust quickly. This different speed of adjustment to equilibrium allows for behavior regarding rates and prices.,5.Exchange Rate Overshooting,At times,spot exchange rates move too much given s

19、ome economic disturbance.Also, we have observed instances when country A has a higher inflation rate than country B, yet As currency appreciates relative to Bs. such anomalies can be explained in the context of an “overshooting” exchange rate model. We assume that financial markets adjust instantane

20、ously to an exogenous shock, whereas goods markets adjust slowly over time. With this setting, we analyze what happens when country A increases its money supply.,5.Exchange Rate Overshooting,For equilibrium, money demand must equal supply. If the money supply increases, something must happen to incr

21、ease demand. Assuming that people hold money for transactions purposes, and holding bonds to pay an interest rate i. A money demand equation: Md=aY+bi Md,the real stock of money demanded Y, income I, interest rate and i, or b is negative.,5.Exchange Rate Overshooting,As y increases, tend to demand more things includ