4. Exchange rates and open economy macroeconomics (2011)Apunte Inglés
|Universidad||Universidad Internacional de Cataluña (UIC)|
|Grado||Administración y Dirección de Empresas (ADE) English Programme - 1º curso|
|Año del apunte||2011|
|Fecha de subida||05/06/2014|
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Exchange Rates and Open-‐ Economy Macroeconomics: • Exchange rate: price of a currency in terms of another oneà E=C1/C2 • Characteristics: o Allows comparisons of relative prices of goods and services. o Are determined by the interaction of buyers and sellers. o Mayor participants in foreign exchange markets: Commercial banks, firms, central banks and non-‐ financial institutions. o The future value of deposits in foreign currency depends on the interest rate and the expected change. o Changes in exchange rates: described by the appreciation or depreciation of a currency § Increases in interest rates of a currency may cause it to appreciate • Foreign exchange rates markets and interest rates: o Determined by the interaction of buyers and sellers o A higher interest rate can influence the appeal of the investment in that currency à translates into inflow of capital § If you loose investors you can have as a consequence great fluctuations of your currency • Big Mac Index (or purchasing power parity) says that exchange rates should even out the prices of Big Macs across the world o Implied PPP: exchange rate at which a Big Mac would cost the same worldwide. o PPP is a long-‐term indicator, which points to where currencies ought to go. Better to use it between countries at a similar stage of development. • Real exchange rates: measure of prices of one country’s goods and services relative to other’s o Nominal exchange rate: refers to the relative price o Determined by nominal exchange rates and price levels. § Real exchange rates don’t change in the short-‐term, but price levels do. § USD/GBD real E.R à USD price of a reference basket o Regimes: floating or fixed § Floating exchange rates à Advantages: • Foreign currency reserves are not necessary • Freedom to apply economic policies • Fast short term adjustment § Floating exchange rates à Objections: • Reduces benefits of economies of scale (higher costs) • Stimulate speculation, uncertainty and instability • They can impact home prices § Fixed Exchange Rates à Advantages: • Stimulate cooperation and integration • Brings stability and certainty (prices are less inflationary) • You can make decisions about investment in a long term basis. § Examples. • The euro is fixed in Europe and floating respect to other currencies. • The Yuan is fixed • Relationship between currency and competitors: o Getting competitive through exchange rates is considered unfair competition o Devaluation of a currency helps to gain competitiveness • § But also leads to inflation (very tricky) and retaliation. o Leads to currency wars Impossible trinity (Open-‐ economy trilemma): While one version of the impossible trinity is focused on the extreme case – with a perfectly fixed exchange rate and a perfectly open capital account, a country has absolutely no autonomous monetary policy – the real world has thrown up repeated examples where the capital controls are loosened, resulting in greater exchange rate rigidity and less monetary-‐policy autonomy. o Fixed Exchange rates o International mobility of capital o Autonomy in national monetary policy. ...