International Economics
Download 7.1 Mb. Pdf ko'rish
|
Dominick-Salvatore-International-Economics
(i and i
∗ ), the expected appreciation of the foreign currency (EA), the risk premium on holding the for- eign bond (RP), as well as real GDP (Y), prices (P), and wealth (W) in the nation. Setting M, D , and F equal to their respective supplies, we get the equi- librium quantity of money balances, domestic bonds, and foreign bonds, as well as the equilibrium rates of interest in the home and in the foreign nations, and the exchange rate between their currencies. Any change in the value of any of the variables of the model will affect every other variable of the model. The exchange rate is determined in the process of reaching equilib- rium in each financial market simultaneously. 5. Having been accumulated over a long period of time, the total stock of financial assets in investors’ port- folios is very large. Any change in interest rates, expectations, or other forces that affect the benefits and costs of holding the various financial assets are likely to lead to an immediate or very rapid change in their stock as investors attempt to quickly reestablish equilibrium in their portfolios. Since adjustments in the real sector (trade flows) occur only gradually over time, most of the burden of adjustment in exchange rates must come from financial markets in the very short and short runs. Thus, the exchange rate must Salvatore c15.tex V2 - 10/18/2012 12:45 A.M. Page 494 494 Exchange Rate Determination overshoot or bypass its long-run equilibrium level for equilibrium to be quickly reestablished in financial markets. Over time, as the cumulative contribution to adjustment coming from the real (trade) sector is felt, the exchange rate reverses its movement and the over- shooting is eliminated. Since underlying conditions in financial markets are in constant flux, exchange rates are very volatile. 6. Empirical tests do not provide much support for the monetary and the portfolio balance models, except in the long run. Short-run exchange rates have defied all attempts at accurate forecasting. One reason for this is the importance of news, which cannot be pre- dicted. Another reason is the existence or development of speculative bubbles, which often move exchange rates away from fundamentals. This does not mean that these theories are wrong or that they are not useful. It simply means that they provide incomplete explanations of exchange rate determination. A L O O K A H E A D This chapter concludes Part Three, which deals with the balance of payments, foreign exchange markets, and exchange rate determination. Part Four examines the rela- tionship between the external sector and the rest of the national economy, as well as the operation of the inter- national monetary system. Part Four begins with Chapter 16, which discusses how the exchange rate affects the nation’s current account and how trade flows help to determine exchange rates in the long run. Chapter 17 focuses on how international trade and the current account affect and are in turn affected by changes in the level of national income. Chapters 18 and 19 then deal with macro- economic policies in open economies, and Chapters 20 and 21 look at the operation and future of the international monetary system. K E Y T E R M S Absolute purchasing-power parity theory, p. 464 Balassa–Samuelson effect, p. 465 Demand for money, p. 471 Exchange rate overshooting, p. 487 Expected change in the spot rate, p. 482 Law of one price, p. 464 Monetary approach to the balance of payments, p. 471 Monetary base, p. 472 Portfolio balance approach, p. 481 Purchasing-power parity (PPP) theory, p. 464 Real exchange rate, p. 477 Relative purchasing-power parity theory, p. 465 Risk premium (RP ), p. 483 Supply of money, p. 471 Q U E S T I O N S F O R R E V I E W 1. Which are the modern and the traditional exchange rate theories? What distinguishes them? What is the relevance of each? What is the relationship between them? 2. What is the purchasing-power parity theory? What are its uses? What is the absolute purchasing-power parity theory? Why is this not acceptable? Download 7.1 Mb. Do'stlaringiz bilan baham: |
Ma'lumotlar bazasi mualliflik huquqi bilan himoyalangan ©fayllar.org 2024
ma'muriyatiga murojaat qiling
ma'muriyatiga murojaat qiling