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
Asignatura World Economics
Año del apunte 2011
Páginas 2
Fecha de subida 05/06/2014
Descargas 3
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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.   ...