Exchange rate determination: Russian rouble Seppo Suominen, Ph.D. (Econ) Tähän kuva omasta kampuksesta

Exchange rate determination: Russian rouble From the July 2014, the international crude oil price has been continuously declined. The exchange rate of ruble has been depreciated. The crisis of ruble happened because the Russia's economy depends on oil export highly. According to the research, The RUB exchange rate is a one-way cause-and-effect relationship with oil price EUR/RUB

RUB/EUR 

Flexible exchange rates are determined by supply and demand balance-of-payments account = list of reasons a currency being supplied and demanded Flexible exchange rates are determined by supply and demand Modern theories of exchange rates Export – Import < 0, then devaluation Supply = import (value = price x quantity), demand = export Money or monetary asset aggregates .

balance-of-payments account = list of reasons a currency being supplied and demanded Explains when a) small country, b) international direct investments (FDI) and portfolio investments (by insurance companies etc.) are not important From 1950’s to 1980’s Russia: export of oil in trade statistics? .

balance-of-payments account = list of reasons a currency being supplied and demanded Russia .

balance-of-payments account = list of reasons a currency being supplied and demanded Russia .

Oil export value = price x volume is important balance-of-payments account = list of reasons a currency being supplied and demanded Oil export value = price x volume is important .

balance-of-payments account = list of reasons a currency being supplied and demanded .

balance-of-payments account = list of reasons a currency being supplied and demanded .

Flexible exchange rates are determined by supply and demand We can construct the supply curve of a currency from a country’s demand curve for imports. We can construct the demand curve for a currency from the country’s supply curve of exports. The supply curve of a currency shows the amount of that currency supplied on the horizontal axis and the price of the currency (the exchange rate) on the vertical axis, however, it is not quantities on the horizontal axis (- like automobiles produced per month - ) but it is values ( - how many British pounds, or how many euros -) .

Flexible exchange rates are determined by supply and demand .

Flexible exchange rates are determined by supply and demand .

Flexible exchange rates are determined by supply and demand .

Flexible exchange rates are determined by supply and demand .

Flexible exchange rates are determined by supply and demand The problem with this explanation is that the value of supply and demand determine the exchange rates – not volume. It is possible that as the international price goes up, the quantity goes down and the value goes up or down depending on price elasticity of demand .

Flexible exchange rates are determined by supply and demand The problem with this explanation is that the value of supply and demand determine the exchange rates – not volume. It is possible that as the international price goes up, the quantity goes down and the value goes up or down depending on price elasticity of demand Unstable or stable? .

Flexible exchange rates are determined by supply and demand Unstable or stable? a sufficient condition for stability: the Marshall-Lerner condition (έm + έx > 1), for exchange rate instability : έm + έx < 1 which is possible when demand for imports is inelastic – e.g. έm = 0,4 and έx = 0,3 a depreciation increases the price of imports in terms of domestic currency, this reduces the quantity of imports but does not necessarily reduce the value of imports, and a depreciation can worsen the balance of trade .

Flexible exchange rates are determined by supply and demand Unstable or stable? when imports and exports are sufficiently inelastic in the short run, both unstable exchange rates and a temporary worsening of the balance of trade after currency depreciation – but in the long run the imports and exports are more elastic the trade balance turns around and stability returns to foreign exchange market J-curve  RISK .

Flexible exchange rates are determined by supply and demand .

Modern theories of exchange rates stocks of assets: such as money stocks (the monetary theory of exchange rates), or such as bonds (the asset approach to exchange rates) Monetary theory MUS = Money demand (supply) in USA PUS = price level in USA QUS = production (GDP) in USA r = interest rate ά and β are parameters .

Modern theories of exchange rates .

Modern theories of exchange rates .

Modern theories of exchange rates .

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