Beruflich Dokumente
Kultur Dokumente
3
Index
110 130 150 170 190 210 70 90
Jan-95 Mar-95 May-95 Jul-95 Sep-95 Nov-95 Jan-96 Mar-96 May-96 Jul-96 Sep-96 Nov-96 Jan-97 Mar-97 May-97 Jul-97 Sep-97 Nov-97 Jan-98 Mar-98 May-98 Jul-98 Sep-98 Nov-98 Jan-99 Mar-99 May-99 Jul-99 Sep-99
Month THB/USD TWD/USD KRW/USD
PHP/USD
SGD/USD
MYR/USD
S
Supply of Dollars by people who want pesos
Currency depreciation is an increase in the number of units of a particular currency needed to purchase one unit of foreign exchange Currency appreciation is a decrease in the number of units of a particular currency needed to purchase one unit of foreign exchange
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7.4 8 7.5 7.6 7.7 7.8 7.9 8.1 8.2 8.3 8.4
1/2/2004 2/2/2004 3/2/2004 4/2/2004 5/2/2004 6/2/2004 7/2/2004 8/2/2004 9/2/2004 10/2/2004 11/2/2004 12/2/2004 1/2/2005 2/2/2005 3/2/2005 4/2/2005 5/2/2005 6/2/2005 7/2/2005 8/2/2005 9/2/2005 10/2/2005 11/2/2005 12/2/2005 1/2/2006 2/2/2006 3/2/2006 4/2/2006 5/2/2006 6/2/2006 7/2/2006 8/2/2006 9/2/2006 10/2/2006 11/2/2006 12/2/2006 1/2/2007 2/2/2007 3/2/2007
China
Chinese Yuan to One U.S. Dollar
Currency Crisis
Exchange rate Baht/$
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Index
110 130 150 170 190 210 70 90
Jan-95 Mar-95 May-95 Jul-95 Sep-95 Nov-95 Jan-96 Mar-96 May-96 Jul-96 Sep-96 Nov-96 Jan-97 Mar-97 May-97 Jul-97 Sep-97 Nov-97 Jan-98 Mar-98 May-98 Jul-98 Sep-98 Nov-98 Jan-99 Mar-99 May-99 Jul-99 Sep-99
Month THB/USD TWD/USD KRW/USD
PHP/USD
SGD/USD
MYR/USD
If E = 100 yen/$ then prices are: American Steel In U.S. In Japan $100 10,000 yen Japanese Steel $100 10,000 yen
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Basic Principle: If factor increases demand for domestic goods relative to foreign goods, E
An exchange rate is the price of domestic assets in terms of foreign assets Using the theory of asset demandthe most important factor affecting the demand for domestic (dollar) assets and foreign (euro) assets is the expected return on these assets relative to each other
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Al iD iF (Eet+1 Et)/Et
iD iF + (Eet+1 Et)/Et
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Deriving RF Curve
Assume iF = 10%, Eet+1 = 1 euro/$ Point A: Et = 0.95, RF = .10 (1 0.95)/0.95 = .048 = 4.8% B: Et = 1.00, RF = .10 (1 1.0)/1.0 = .100 =10.0% C: Et = 1.05, RF = .10 (1 1.05)/1.05 = .148 = 14.8% RF curve connects these points and is upward sloping because when Et is higher, expected appreciation of F higher, RF
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Shifts in RF
RF curve shifts right when 1. iF : because RF at each Et 2. Eet+1 : because expected appreciation of F at each Et and RF Occurs Eet+1 iF: 1) Domestic P , 2) Trade Barriers 3) Imports , 4) Exports , 5) Productivity
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Shifts in RD
RD shifts right when 1. iD ; because RD at each Et Assumes that domestic e unchanged, so domestic real rate
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Foreign Exchange I
Exchange rateprice of one currency in terms of another Foreign exchange marketthe financial market where exchange rates are determined Spot transactionimmediate (two-day) exchange of bank deposits
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Foreign Exchange II
Appreciationa currency rises in value relative to another currency Depreciationa currency falls in value relative to another currency When a countrys currency appreciates, the countrys goods abroad become more expensive and foreign goods in that country become less expensive and vice versa Over-the-counter market mainly banks
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Assumes all goods are identical in both countries Trade barriers and transportation costs are low Many goods and services are not traded across borders
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Response to i Because e
1. e , Eet+1 , expected appreciation of F , RF shifts out to right 2. iD , RD shifts to right However because e > iD , real rate , Eet+1 more than iD RF out > RD out and Et
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Response to Ms
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1. Ms , P , Eet+1 expected appreciation of F , RF shifts right 2. Ms , iD , RD shifts left Go to point 2 and Et 3. In the long run, iD returns to old level, RD shifts back, go to point 3 and get Exchange Rate Overshooting
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1.
2.
Value of $ and real rates rise and fall together, as theory predicts No association between $ and nominal rates: $ falls in late 70s as nominal rate rises
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Chapter 18
Federal Reserve System Liabilities Deposits with the Fed (reserves) -$1B
A central banks purchase of domestic currency and corresponding sale of foreign assets in the foreign exchange market leads to an equal decline in its international reserves and the monetary base A central banks sale of domestic currency to purchase foreign assets in the foreign exchange market results in an equal rise in its international reserves and the monetary base
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Unsterilized Intervention
An unsterilized intervention in which domestic currency is sold to purchase foreign assets leads to a gain in international reserves, an increase in the money supply, and a depreciation of the domestic currency
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(International Reserves)
Government Bonds
-$1B (reserves)
+$1B
To counter the effect of the foreign exchange intervention, conduct an offsetting open market operation There is no effect on the monetary base and no effect on the exchange rate
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Balance of Payments
Current Account
Capital Account
Trade Balance
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Exchange-Rate Targeting
Advantages
1. Fixes for internationally traded goods 2. Anchors expectations 3. Automatic rule, avoids time-consistency 4. Easy to understand: sound currency as rallying cry 5. Helps economic integration 6. Successful in reducing France, UK, Mexico
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Exchange-Rate Targeting
Disadvantages
1. Loss of independent monetary policy Problems after German reunification: UK, French monetary policy too tight 2. Open to speculative attacks Europe, Sept. 1992; Mexico: 1994; Asia: 1997 3. Successful speculative attack disastrous for emerging market countries because it leads to financial crisis 4. Weakened accountability: lose exchange-rate signal
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Dollarization
1. Even stronger commitment mechanism 2. No possibility of speculative attack 3. Usual disadvantages of fixed exchange rtae 4. Lose seignorage
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Monetary Targeting
Canada 1. Targets M1 till 1982, then abandons it 2. 1988: declining targets, M2 as guide United Kingdom 1. Targets M3 and later M0 2. Problems of M as monetary indicator Japan 1. Forecasts M2 + CDs 2. Innovation and deregulation makes less useful as monetary indicator 3. High money growth 1987-1989: bubble economy, then tight money policy Germany and Switzerland 1. Not monetarist rigid rule 2. Targets using M0 and M3: changes over time 3. Allows growth outside target for 2-3 years, but then reverses overshoots 4. Key elements: flexibility, transparency, and accountability
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Monetary Targeting
Advantages
1. Able to cope with domestic considerations 2. Signals are immediate 3. Immediate accountability of central bank
Disadvantages
1. Big if: all advantages require reliable relationship between goal and targeted aggregate 2. In many countries, weak relationship between goal and Maggregate Poor communications device and accountability
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Inflation Targeting
Five Elements
1. Public announcement of medium-term target 2. Institutional commitment to price stability 3. Information inclusive strategy 4. Increased transparency through public communication 5. Increased accountability
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Inflation Targeting
Advantages
1. Allows focus on domestic considerations 2. Not dependent on reliable relationship between Maggregate and inflation 3. Readily understood by public 4. Reduce political pressures for time-consistent policy 5. Focus on transparency and communication 6. Increased accountability of central bank 7. Performance good: and e , and stays low in business cycle upturn
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Inflation Targeting
Disadvantages
1. Delayed signalling 2. Too much rigidity 3. Potential for increased output fluctuations 4. Low economic growth
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Disadvantages
1. Lack of transparency and accountability 2. Dependence on personalities 3. Inconsistent with democratic principles
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As the relative expected return on dollar assets increases, foreigners will want to hold more dollar assets
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Which is the same as previously Relative expected return on dollar assets is the same whether it is calculated in terms of euros or in terms of dollars
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As the relative expected return on dollar assets increases, both foreigners and domestic residents will want to hold more dollar assets
e t1
Et Et
Capital mobility with similar risk and liquidity the assets are perfect substitutes The domestic interest rate equals the foreign interest rate minus the expected appreciation of the domestic currency Expected returns are the same on both domestic and foreign assets An equilibrium condition
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Demand
Relative expected return At lower current values of the dollar (everything else equal), the quantity demanded of dollar assets is higher
Supply
The amount of bank deposits, bonds, and equities in the U.S. Vertical supply curve
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Monetary Neutrality
In the long run, a one-time percentage rise in the money supply is matched by the same one-time percentage rise in the price level
The exchange rate falls by more in the short run than in the long run
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While there is a strong correspondence between real interest rates and the exchange rate, the relationship between nominal interest rates and exchange rate movements is not nearly as pronounced
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Value of a currency is pegged relative to the value of one other currency (anchor currency)
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Gold standard
Fixed exchange rates No control over monetary policy Influenced heavily by production of gold and gold discoveries
Fixed exchange rates using U.S. dollar as reserve currency International Monetary Fund (IMF)
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When the domestic currency is overvalued, the central bank must purchase domestic currency to keep the exchange rate fixed, but as a result, it loses international reserves When the domestic currency is undervalued, the central bank must sell domestic currency to keep the exchange rate fixed, but as a result, it gains international reserves
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Exchange rates adjusted only when experiencing a fundamental disequilibrium (large persistent deficits in balance of payments) Loans from IMF to cover loss in international reserves IMF encourages contractionary monetary policies Devaluation only if IMF loans are not sufficient No tools for surplus countries
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Managed Float
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8 members of EEC fixed exchange rates with one another and floated against the U.S. dollar ECU value was tied to a basket of specified amounts of European currencies Fluctuated within limits Led to foreign exchange crises involving speculative attack
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Capital Controls
Outflows
Promote financial instability by forcing a devaluation Controls are seldom effective and may increase capital flight Lead to corruption Lose opportunity to improve the economy
Inflows
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Inflows (contd)
Controls may block funds for productions uses Produce substantial distortion and misallocation Lead to corruption
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Emerging market countries with poor central bank credibility and short-run debt contracts denominated in foreign currencies have limited ability to engage in this function May be able to prevent contagion The safety net may lead to excessive risk taking (moral hazard problem)
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May not be tough enough Austerity programs focus on tight macroeconomic policies rather than financial reform Too slow, which worsens crisis and increases costs
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Intervention in the foreign exchange market affects the monetary base U.S. dollar has been a reserve currency: monetary base and money supply is less affected by foreign exchange market
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Balance-of-Payments Considerations
Current account deficits in the U.S. suggest that American businesses may be losing ability to compete because the dollar is too strong U.S. deficits mean surpluses in other countries large increases in their international reserve holdings world inflation
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A contractionary monetary policy will raise the domestic interest rate and strengthen the currency An expansionary monetary policy will lower interest rates and weaken currency
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Contributes to keeping inflation under control Automatic rule for conduct of monetary policy Simplicity and clarity
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Cannot respond to domestic shocks and shocks to anchor country are transmitted Open to speculative attacks on currency Weakens the accountability of policymakers as the exchange rate loses value as signal
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Domestic monetary and political institutions are not conducive to good policy making Other important benefits such as integration
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Political and monetary institutions are weak Stabilization policy of last resort
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Currency Boards
Solution to lack of transparency and commitment to target Domestic currency is backed 100% by a foreign currency Note issuing authority establishes a fixed exchange rate and stands ready to exchange currency at this rate
Money supply can expand only when foreign currency is exchanged for domestic currency
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Stronger commitment by central bank Loss of independent monetary policy and increased exposure to shock from anchor country Loss of ability to create money and act as lender of last resort
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Dollarization
Another solution to lack of transparency and commitment Adoption of another countrys money
Lost of independent monetary policy and increased exposure to shocks from anchor country
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Dollarization (contd)
Inability to create money and act as lender of last resort Loss of seignorage
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Appendix
Slides after this point will most likely not be covered in class. However they may contain useful definitions, or further elaborate on important concepts, particularly materials covered in the text book.
They may contain examples Ive used in the past, or slides I just dont want to delete as I may use them in the future.
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