ECON 463: What you learned Balance of Payments Balance Capital Inflows = Current Account Deficit - CA = Im – X = (I – S) + (G – T) - CA = Im – X = (I – S) + (G – T) Threat of Hard-landing Parity Conditions Interest Rate Parity (IRP) –Covered – Uncovered Purchasing Power Parity (PPP) – Absolute PPP – Relative PPP Fisher Condition

What you learned, continued Floating Exchange Rates –Monetary sphere matters –Real shocks are buffered –Much depends on exchange rate expectations Overshooting and volatility Fixed Exchange Rates –Real shocks matter (fiscal policy matters) –Monetary sphere is constrained R = R* –Automatic adjustment of balance of payments B of P Surplus  Reserves Up  M s Up  P Up Sterilization in theory and practice

Analytical Niceties Float vs. Fixed Monetary Sphere (AA) vs. Real Sphere (DD) –Money Supply-Fiscal Policy –Interest Rates (R,R*)-Real Exchange Rate –E expectations- q = E(P* / P) Monetary sphere clears immediately Temporary Changes vs. Permanent Changes The Runs: Immediate - … Short - … Long - Run Internal Balance vs. External Balance

Alternative Exchange Rate Regimes Hard fix ……………………… …….Free Float The Hollow Center Impossible Trilogy Fixed rates /Independent M – Policy /Free Capital Flows Optimal Currency Areas –The Eurozone? Epochs –Classical Gold Standard –Interwar Years –Bretton Woods –Managed Float