Beruflich Dokumente
Kultur Dokumente
21
Exchange Rate Regimes
Macroeconomics, 3/e
Olivier Blanchard
Fixed Exchange Rates and the Adjustment of 21-1 the Real Exchange Rate in the Medium Run
In the medium run, the economy reaches the same real exchange rate and the same level of output, whether it operates under fixed exchange rates or under flexible exchange rates. Under fixed exchange rates, the adjustment takes place through the price level rather than through the nominal exchange rate.
Macroeconomics, 3/e
Olivier Blanchard
The focus of this chapter is on the real exchange rate, government spending, and taxes. Therefore, we simplify the relation above as follows:
EP * Y ! Y , G, T P ( , , )
2003 Prentice Hall Business Publishing Macroeconomics, 3/e Olivier Blanchard
Macroeconomics, 3/e
Olivier Blanchard
Macroeconomics, 3/e
Olivier Blanchard
Macroeconomics, 3/e
Olivier Blanchard
devaluation. The initial effects of a depreciation may be contractionary. The price of imported goods increases, making consumers worse off. This may lead workers to ask for higher nominal wages, and firms to increase their prices as well.
Macroeconomics, 3/e
Olivier Blanchard
21-2
Higher inflation, or the steady increase in the prices of domestic goods, leads to a steady real appreciation and worsening of a countrys trade position. Lowering the domestic interest rate triggers an increase in the nominal exchange rate, or nominal depreciation. The size of the devaluation can be estimated using the interest parity condition.
2003 Prentice Hall Business Publishing Macroeconomics, 3/e Olivier Blanchard
e t 1
Et
Et
Macroeconomics, 3/e
Olivier Blanchard
Macroeconomics, 3/e
Olivier Blanchard
21-3
Macroeconomics, 3/e
Olivier Blanchard
exchange rate. For example, forecasts of the current account balance. Trade deficits may lead to a depreciation. Any factor that moves current or expected future domestic or foreign interest rates. For example, anticipations of high short-term interest rates in the shortfuture.
Macroeconomics, 3/e
Olivier Blanchard
21-4
In the short run, under fixed exchange rates, a country gives up its control of the interest rate and the exchange rate. Also, anticipation that a country may be about to devalue its currency may lead investors to ask for very high interest rates. An argument against flexible exchange rates is that they may move a lot and may be difficult to control them through monetary policy.
2003 Prentice Hall Business Publishing Macroeconomics, 3/e Olivier Blanchard
Macroeconomics, 3/e
Olivier Blanchard
choose roughly the same monetary policy. Countries have high factor mobility, which allow countries to adjust to shocks.
A common currency, such as the Euro, allows Euro, countries to lower the transaction costs of trade.
2003 Prentice Hall Business Publishing Macroeconomics, 3/e Olivier Blanchard
Macroeconomics, 3/e
Olivier Blanchard