ShortRun(國際金融-香港大學(xué),WONGKaFu)

1、1Output and Exchange Rate in the Short RunWONG Ka Fu28th February 20002Aggregate demand for domestic goodszD=C + I + G + CA= C + I + G + EX - IM3Consumption of domestic goodszC = C (Yd), dC/dYd 0 = C (Y-T)Yd = disposable income4Consumption by home citizensConsumptionConsumptionof domestic goodsI.e.,

2、 CConsumptionof foreign goodsI.e., IM5Current accountzCA = CA (qH/F,Yd) = EX (qH/F,Yd) - IM (qH/F,Yd) qH/F = (EH/F PF) / PH The units of home good basket per foreign good basket.For completeness, we can also writeCA = CA (qH/F,Yd ,YFd), YFd =Foreign disposable income6 CA/ qH/F 0 (CA measured in dome

3、stic output) qH/F EXIMvolumepriceIM?CAAssumed7 CA/ Yd D/ Y 0YCCADAlthough an increase in Y is expected to raise the total consumption (IM and C) by an unknown amount, we assume the increase in C is larger than the increase in IM.Because import increasesbut export remains unchanged101 D/ Y 0Output (r

4、eal income), YAggregate demand, DD(qH/F,Y-T,I,G)11Determination of output in the short runOutput (real income), YAggregate demand, DD(qH/F,Y-T,I,G)D=Y12Effect of an increase in E on short-run output equilibriumOutput (real income), YAggregate demand, DD=YD(EH/F2 PF / PH,Y-T,I,G)Home currency depreci

5、ation, i.e., E2E1Y1Y2D(EH/F1 PF / PH,Y-T,I,G)13Output, YOutput, YD=YD(EH/F1 PF / PH,Y-T,I,G)D(EH/F2 PF / PH,Y-T,I,G)E1E2DEDDY1Y2The DD schedule14Output, YOutput, YD=YD(EH/F1 PF / PH,Y-T,I,G)D(EH/F2 PF / PH,Y-T,I,G)E1E2DEDDY1Y2If we were at 3.3315Output, YOutput, YD=YD(EH/F PF / PH,Y-T,I,G1)D(EH/F PF

6、 / PH,Y-T,I,G2)EDEDD1Y1Y2Effect of an G increaseDD216The following changes have similar effect on DD schedulezAn increase in GzA decrease in TzAn increase in IzA decrease in PHzAn increase in PFzAn autonomous increase in consumptionzA shift of demand from foreign to domestic goods17Rate of return(in

7、 home currency)Expected return on foreign depositReturn on home depositHD/FDexchange rate0(MsH/PH)1L(RH,YH)11EH/F1Real money holdingsRelationship between Exchange rate and money supply18Rate of return(in home currency)Expected return on foreign depositReturn on home depositHD/FDexchange rate0(MsH/PH

8、)1L(RH,YH1)11EH/F1Real money holdingsEffect of an increase in output L(RH,YH2)EH/F22219AAOutput, YExchangeRate, EE1E2Y1Y220AAOutput, YExchangeRate, EE1E2Y1Y23If we were at 3 .21Rate of return(in home currency)Expected return on foreign depositReturn on home depositHD/FDexchange rate0(MsH/PH)1L(RH,YH

9、1)11EH/F1Real money holdingsIf we were at 3 .L(RH,YH2)EH/F222322Factors that shift the AA schedulezA change in real money supply yA change in MsyA change in PzA change in EezA change in RFzA change in L(RH,Y)23Output, YExchangeRate, EDDAAY1E1Short-run equilibrium: The intersection of DD and AA124Out

10、put, YExchangeRate, EDDAAY1E1If we were at 2 .1E3E223Note: Asset market adjust much faster than output 25Temporary changes in monetary and fiscal policyzTemporary policy shifts are shifts that the public expects to be reversed in the near future. zA temporary policy shift does not affect the long-ru

11、n expected exchange rate, EH/Fe.26A permanent increase in money supplyTimeMoney supplyt027A temporary increase in money supplyTimeMoney supplyt0t128Output, YExchangeRate, EDDAA1Y1E1A temporary increase in money supply12AA2Y2E229A temporary Fiscal expansion (increase in government expenditure)TimeGov

12、ernment expedituret0t130Output, YExchangeRate, EDD1AAY1E1A Temporary Fiscal Expansion1DD22E2Y231A temporary under full employment caused by a temporary fall in world demandthe restoration of full employmentand 32A temporary fall in world demandTimeWorld demandt0t133Output, YExchangeRate, EDD2AAY2E2A

13、 temporary fall in world demand2DD11E1Yf34Two ways to restore full employmentzA temporary fiscal policyzA temporary monetary policy35Output, YExchangeRate, EDD2AAY2E2Restoring full employment by a temporary fiscal expansion2DD11E1Yf36Output, YExchangeRate, EDD2AA1Y2E2Restoring full employment by a t

14、emporary monetary expansion2DD11E1YfE33AA237Different effects in the use of fiscal and monetary tools to restore full employmentFiscalz temporary increase in G: purchase domestic goodsz budget deficitz Exchange rate returns to pre-shock levelz Monetaryz temporary increase in money supplyz interest r

15、ate decreasesz Exchange rate (E) higher than pre-shock levelz Exchange rate also higher than the case without any stabilizing policy.38A temporary under full employment caused by a temporary increase in money demandthe restoration of full employmentand 39A temporary increase in money demandTimeMoney

16、 demandt0t140Output, YExchangeRate, EDD1AA2Y2E2A temporary increase in money demand2YfE11AA141Two ways to restore full employmentzA temporary fiscal policyzA temporary monetary policy42Output, YExchangeRate, EDD1AA2Y2E22YfE11AA1Restoring full employment by a temporary monetary expansion43Output, YEx

17、changeRate, EDD1AA2Y2E2Restoring full employment by a temporary fiscal expansion2DD23E3YfE11AA144Permanent shifts in monetary and fiscal policyzA permanent policy shift affects not only the value of the governments policy instrument (the money supply, government spending, or taxes) but also the long

18、-run exchange rate zand hence expectations about future exchange rates45A permanent increase in money supply46A permanent increase in money supplyTimeMoney supplyt047Rate of return(in home currency)Expected return on foreign depositReturn on home depositHD/FDexchange rate0(MsH1/PH)EH/F3Real money ho

19、ldingsEffect of a permanent increase in money supply L(RH,YH)EH/F1EH/F2(MsH2/PH)48Output, YExchangeRate, EDDAA1YfE1A permanent increase in money supply12AA2Y2E2349Change in price level after a permanent increase in money supplyzPrice level rigid in the short runzPrice level slowly adjusts in the int

20、ermediate runzPrice level changes by the same proportion as the change in money supply in the long run.50Output, YExchangeRate, EDD1AA1YfE1Long-run adjustment to a permanent increase in money supply12AA2Y2E23AA3DD2E351Overshooting revisitedzAfter a permanent change in monetary policy, the initial re

21、sponse of exchange rate is greater than its long-run response.52A permanent fiscal expansion53Output, YOutput, YD=YD(EH/F1 PF / PH,Y-T,I,G)D(EH/F2 PF / PH,Y-T,I,G)E1E2DEDDY1Y2The DD schedule54Output, YOutput, YD=YD(EH/F PF / PH,Y-T,I,G1)D(EH/F PF / PH,Y-T,I,G2)EDEDD1Y1Y2Effect of an G increaseDD255O

22、utput, YExchangeRate, EDD1E1Effect of a Permanent Fiscal Expansion on DDDD256A permanent fiscal expansion implies an increase in world relative demand for home productsRelative demand for home productsEH/Fbecause EH/F = qH/F (PH / PF) qH/F57Rate of return(in home currency)Expected return on foreign

23、depositReturn on home depositHD/FDexchange rate0(MsH/PH)1L(RH,YH)11EH/F1Real money holdingsRelationship between Exchange rate and money supply58Rate of return(in home currency)Expected return on foreign depositReturn on home depositHD/FDexchange rate0(MsH/PH)1L(RH,YH1)11EH/F1Real money holdingsEffec

24、t of an increase in output L(RH,YH2)EH/F22259AAOutput, YExchangeRate, EE1E2Y1Y260Rate of return(in home currency)Expected return on foreign depositReturn on home depositHD/FDexchange rate0(MsH/PH)1L(RH,YH1)EH/F1Real money holdingsEffect of a decrease in expected EH/FEH/F261Output, YExchangeRate, EAA

25、1E1Effect of a Permanent Fiscal Expansion on AAE2AA262Claim:short-run output unchanged after a permanent fiscal expansion63Output, YExchangeRate, EDD1AA1YfE1A Permanent Fiscal ExpansionClaim: short-run output unchanged1DD22E2AA2364Why must the shift in AA offset the shift in DD in the short run?65A

26、possibility: A permanent fiscal expansion implies an increase in world relative demand for home productsRelative demand for home productsEH/Fbecause EH/F = qH/F (PH / PF) qH/F66AssumptionszThe economy starts out in long-run equilibrium, I.e., yY= YfyRH = RF67The long-run effect of a permanent fiscal

27、 expansionzoutput unchanged YfzMs unchangedzL(R,Y) unchanged because output unchangedzP unchanged 68Proof by contractionzKnow what would happen in the long runzWant to show that the proposed short-run equilibrium is consistent with the “known” long run equilibrium.zSuppose the proposed SR is wrong,

28、I.e. SR equilibrium output is above full employmentzWant to show that we will never return to the “known” long run equilibrium.69Can Y Yf in the short run?z1. Note that Ms/P unchanged in the short runz2. Suppose Y Yf in the short run.70Output, YExchangeRate, EDD1AA1YfE1If Y Yf in the short run1DD22E

29、2AA2371Can Y Yf in the short run?z3. L(R,Y) rises for a given interest rate RH. z4. Because Ms/P unchanged in the short run, RH must rise. I.e., RH RF . z5. By interest parity, E would decrease.zThis is the supposed short-run equilibrium as shown in the figure. 72Can Y Yf in the short run?z6. Howeve

30、r, because we expect output to fall back to full employment, interest parity implies Ee will have to increase in the long run.z7. Since P unchanged in the long run, q must increase. 73Can Y Yf in the short run?z8. This makes home good cheaper and stimulates demand . z9. Output would increase even mo

31、re.zThus, the assumption that short run output is larger than Yf contradicts that long run output will be Yf. Hence, Y cannot be larger than Yf74What is the Current Account balance at equilibrium?75Output, YExchangeRate, EXX curve: CA(EPF/PH,Y-T) = XYfE1XX (CA = a)76Output, YExchangeRate, EXX curve:

32、 CA(EPF/PH,Y-T) = XYfE1XX (CA = a)XX (CA = b)ba because CA/ qH/F 0 CA/ Yd a)Current account improves80How quickly does current account respond to foreign exchange rate changes?81J-curvezCA worsens immediately after a real currency depreciation and improves only some months later.yBecause most import

33、 and export orders are placed several months in advance and ythe primary effect of the depreciation is to raise the value of the pre-contracted level of imports in terms of domestic products.82Empirical Evidence:z6 - 12 months lagzonly about 50% of the full quantity adjustment takes place in the fir

34、st three yearsz90 % in the first five years83Reasons for lagzImperfect dissemination of information, during which importers recognize that relative prices have changedzlag in deciding to place new import orderzproduction lag even after new import order is placed84Reasons for lag: hysteresiszproducers sometimes relocate their factories to the country where costs are lower because of an exchange rate advantage. Even after the exchange rate has returned to old levels, a company that decided to move operations abroad when the dolla