Output & the Exchange Rate in the Short Run Two kinds of depreciations Britain East Asian countries 92 depreciation 97 depreciation export surged recession+inflation.

Slides:



Advertisements
Similar presentations
International Economics: Theory and Policy, Sixth Edition
Advertisements

Output and the Exchange Rate in the Short Run
Ch. 16: Output and the Exchange Rate in the Short Run.
The influence of monetary and fiscal policy
Chapter 17A Online Appendix
Chapter 16 Output And The Exchange Rate In The Short Run.
Output and the Exchange Rate in the Short Run
Open Economy Macroeconomic Policy and Adjustment
Copyright © 2011 Pearson Addison-Wesley. All rights reserved. Chapter 11 An Introduction to Open Economy Macroeconomics.
22 Aggregate Supply and Aggregate Demand
Output and the Exchange Rate in the Short Run
Determinants of Aggregate Demand in an Open Economy
An Introduction to Basic Macroeconomic Markets
Slides prepared by Thomas Bishop Copyright © 2009 Pearson Addison-Wesley. All rights reserved. Chapter 16 Output and the Exchange Rate in the Short Run.
Chapter 16 Exercise A Permanent Increase in the Money Supply 1.the short-run effect (1)A permanent increase in M s must ultimately lead to a proportional.
Ec 335 International Trade and Finance
Economics 282 University of Alberta
Output and the Exchange Rate in the Short Run. Introduction Long run models are useful when all prices of inputs and outputs have time to adjust. In the.
Ch. 7: Aggregate Demand and Supply
Money, Interest Rates, and Exchange Rates
Mid exam answers 1.We assume that a permanent increase in the growth rate of the U.S. money supply is from  to  +  . The Fed unexpectedly announces.
Financial integration and short-run macroeconomic equilibrium
Macroeconomics (ECON 1211) Lecturer: Dr B. M. Nowbutsing Topic: Open economy macroeconomics.
Copyright ©2004, South-Western College Publishing International Economics By Robert J. Carbaugh 9th Edition Chapter 14: Exchange-Rate Adjustments and the.
AGGREGATE SUPPLY AND AGGREGATE DEMAND
C HAPTER 16 OUTPUT AND THE EXCHNAGE RATE IN THE SHORT RUN.
1 Section 5 The Exchange Rate in the Short Run. 2 Content Objectives Aggregate Demand Output Market Equilibrium Asset Market Equilibrium The Short-Run.
Macroeconomic Policy and Floating Exchange Rates
Chapter 16 Output and the Exchange Rate in the Short Run Supplementary Notes.
1 International Finance Chapter 5 Output and the Exchange Rate in the Short Run.
Output and the Exchange Rate in the Short Run
Unit 3 Basic Theories of BOP (How are the imbalances of BOP adjusted when they occur in a country?)
Balance of Payments Adjustments
A Short-Run Model of an Open Economy1 BA 282 Macroeconomics Class Notes - Part 4.
INTERNATIONAL FINANCE INTERNATIONAL FINANCE. CHAPTER 14 Money, Interest Rates, and Exchange Rates.
Copyright © 2006 Pearson Addison-Wesley. All rights reserved Introduction Long run models are useful when all prices of inputs and outputs have time.
XII. Keynesian stabilization in an open economy. XII.1 Aggregate demand in the short run.
C H A P T E R Prepared by: Fernando Quijano and Yvonn Quijano And Modified by Gabriel Martinez The Goods Market in an Open Economy 19.
Chapter 13 Aggregate Demand and Aggregate Supply.
Chapter 9 The IS–LM–FE Model: A General Framework for Macroeconomic Analysis Copyright © 2016 Pearson Canada Inc.
Copyright © 2012 Pearson Addison-Wesley. All rights reserved. Chapter 17 Output and the Exchange Rate in the Short Run.
1 International Finance Chapter 7 The Balance of Payment II: Output, Exchange Rates, and Macroeconomic Policies in the Short Run.
124 Aggregate Supply and Aggregate Demand. 125  What is the purpose of the aggregate supply-aggregate demand model?  What determines aggregate supply.
AGGREGATE DEMAND AND AGGREGATE SUPPLY 7 CHAPTER 總合需求與總和供給.
Objectives After studying this chapter, you will able to  Explain what determines aggregate supply  Explain what determines aggregate demand  Explain.
1 A Short-Run Model of an Open Economy MBA 774 Macroeconomics Class Notes - Part 4.
Chapter 16 Output and the Exchange Rate in the Short Run Prepared by Iordanis Petsas To Accompany International Economics: Theory and Policy International.
Output and the Exchange Rate in the Short Run
Slide 16-1Copyright © 2003 Pearson Education, Inc. Figure 16-9: How the Economy Reaches Its Short-Run Equilibrium AA Y1Y1 E1E1 1 Short-Run Equilibrium.
Copyright © 2012 Pearson Education. All rights reserved. Chapter 17 Output and the Exchange Rate in the Short Run.
Slide 17-1Copyright © 2003 Pearson Education, Inc. Permanent Shifts in Monetary and Fiscal Policy  A permanent policy shift affects not only the current.
7 AGGREGATE DEMAND AND AGGREGATE SUPPLY CHAPTER.
Output and the Exchange Rate in the Short Run
Output and the Exchange Rate in the Short Run
How the Economy Reaches Equilibrium in the Short Run
Output and the Exchange Rate in the Short Run
Output and the Exchange Rate in the Short Run
Output and the Exchange Rate in the Short Run
Output and the Exchange Rate in the Short Run
Output and the Exchange Rate in the Short Run
EC3067 International Finance
Output, the Interest Rate , and the Exchange Rate
Output and the Exchange Rate in the Short Run
Introduction Long run models are useful when all prices of inputs and outputs have time to adjust. In the short run, some prices of inputs and outputs.
ECO 401: International Economics
Output and the Exchange Rate in the Short Run
Presentation transcript:

Output & the Exchange Rate in the Short Run Two kinds of depreciations Britain East Asian countries 92 depreciation 97 depreciation export surged recession+inflation ??? output, exchange rate, and inflation to understand

Output & exchange rate in the short run Aggregate demand for an open economy’s output is the sum of: C C 1.consumption demand ( C ) C 2.investment demand (I) 3.government demand (G) CA CA 4.net export demand / current account ( CA ) CA

Real exchange rate changes →CA ambiguousthe effect of a real exchange rate change on the current account CA is ambiguous. real depreciation improves current accountother things equal, a real depreciation of the currency improves the current account.

Disposable income changes→CA Disposable income changes →CA worsensan increase in disposable income worsens the current account.

The equation of aggregate demand 实际汇率消费 投资, 政府采购 Real output (Y) = Aggregate demand (D)

2 elements DD output market 1: relationship between output & exchange rate (the DD schedule) that must hold when the output market is in equilibrium home money market asset market 2: relationship between output & exchange rate that must hold when the home money market & the exchange market (the asset market ) are in equilibrium

D Aggregate demand, D Y Output, Y DY D = Y Aggregate demand Fig 16-1, Aggregate Demand as a Function of Output Output↑→demand↑

Output DD Output market equilibrium in the short run: the DD schedule DD = relationship between output & exchange rate

D Aggregate demand, D Y Output, Y DY D = Y Aggregate demand Fig 16-3, Output effect of a currency depreciation with … 贬值 产出增加

DD Deriving the DD schedule When P and P* are fixed, a depreciation of the currency leads to the higher output level. DD outputexchange rateDD : all combinations of output & exchange rate output market is in short-run equilibrium aggregate demand = aggregate output

DD E D Y Y 贬值 产出增加 Output Exchange Rate Output market in Equilibrium

DD Factors that shift the DD schedule 1.government demand, taxes, & investment 2.domestic & foreign price levels 3.variations in domestic consumption behavior 4.foreign demand for home output 增加政府开支,国际收支赤字 DD

DD E D Y Y 贬值 产出增加 Output Exchange Rate DD 政府搞赤字财政 ① ② ③

1.A change in G. T 2.A change in T. I 3.A change in I P 4.A change in P P* 5.A change in P* consumption function 6.A change in the consumption function demand shift 7.A demand shift between foreign & domestic goods.

Any disturbance that raises aggregate demand for domestic output shifts the DD schedule to the right; Any disturbance that lowers aggregate demand for domestic output shifts the DD to the left.

Asset AA Asset market equilibrium in the short run: the AA schedule AAdomestic moneyforeign exchangeAA : equilibrium in the domestic money market & foreign exchange market. foreign interest rate is taken as given

…The changes in the exchange rate must accompany output changes so that asset markets remain in equilibrium.

R E Exchange market Money market Asset market equilibrium ①产出增加 ②本币升值 外汇存款本 币的收益 ● ● ●● E e & R* fixed

upshot For asset markets to remain in equilibrium: a rise in domestic output must be accompanied by an appreciation of the domestic currency, and vice versa. 本币升值本币存款利息上升? 本币升值 = 本币存款利息上升?

Deriving the AA Schedule AA E Y Exchange Rate Output ①产出增加 → ②本币利率上升 ③本币升值 与 DD 线最大不同:先产出, 后升值

AA AA schedule moneyIt relates exchange rates and output levels that keep the money and foreign exchange markets in equilibrium.

AA Factors that shift the AA schedule M s 1.A change in M s. (positive correlate) P 2.A change in P. (negative correlate) E e 3.A change in E e. (positive correlate) R* 4.A change in R*. (positive correlate) LR, Y 5.A change in real money demand L(R, Y). (negatively correlate)

short-run equilibrium for an open economy: DD + AA Assumption: output price temporarily fixed foreign interest rate R* fixed E e fixed. expected future exchange E e fixed. One-short changes→money supplies temporary policy→no effect→E e

DDAA Short-run equilibrium: intersections of DD and AA DD AA E Y 产出市场 资产市场 调整快 调整慢

saddle point DD AA E Y 产出市场 资产市场 贬值打破均衡 预期升值压力 增产速度缓慢 ① ② ③

Temporary changes in monetary & fiscal policy government macroeconomic policy counteracting disturbances outputemploymentinflation

Monetary Policy ①货币供给增加 ②本币贬值 ③产出增加 ④远期汇率不变 ⑤短期效应DD AA E Y ③ ②

Fiscal Policy ①政府开支增或 减少税收 ②提高总需求 ③产出增加 ④远期汇率不变 ⑤短期效应 DD AA E Y 产出增加 ③ 先产出增加 后本币升 值

Policies to maintain full employment monetary policy Fiscal policy 扩大需求刺激产出 Output 贬值扩大出口带动 Output

外需突然减少后如何维持充分就业? DD AA E Y ● monetary policy fiscal policy ① ② ③ fall in world demand→ ② The two policies differ in their exchange rate effects:

Inflation Bias 1.macroeconomic policy→inflation bias: election→temptation→expansion, boom, wage demand↑→spiral →central bank independent. 2.disturbance →output market? or asset market? hard to choose monetary or fiscal policy. 3.fiscal policy →lengthy legislative deliberation; monetary policy →inflation.

4. budget deficit→not to synchronize →business cycle, election cycles. 5. lags of varying length →how much of monetary or fiscal medicine to administrate.

Permanent shifts in monetary &fiscal policy Government policy instruments: money supply government spending taxes long-run exchange rates Initial conditions or assumptions Initial conditions or assumptions : a full employment exchange rate at long-run level domestic interest = foreign interest

A permanent increase in the Money Supply upshot: Money Supply proportional Exchange Rate A permanent increase in Money Supply must ultimately lead to a proportional rise in Exchange Rate. M s = E e

Adjustment to M s ↑ Assumption: full employment, working overtime. M s no lasting effectM s has no lasting effect on output, relative prices, interest rate overshooting phenomenon will return to its full employment position.

E Y ● 充分就业水平 AA DD

fiscal expansion A permanent fiscal expansion Government expenditure→aggregate demand for domestic goods and services; long-run appreciation of currency; fall of the expected future exchange rate;

E Y ● 充分就业水平 AA DD 停留在此 本币升值

Conclusion no net effect on output jumpoffsetsIf the economy starts at long-run equilibrium, a permanent change in fiscal policy has no net effect on output. Instead, it causes an immediate and permanent exchange rate jump that offsets exactly the fiscal policy’s direct effect on aggregate demand.

Macroeconomic policies & current account Monetary & fiscal policies aimed at domestic objectives > current account. DD—AADD—AA model can be extended to…current account. DD—AA—XXDD—AA—XX model: combinations of the exchange rate and output at which the current account balance would be equal to some desired level.

XX curve XX XX is flatter than DD CA balance fall after fiscal expansions.

E Y DD AA XX CA=X monetary expansion temporary fiscal expansion permanent fiscal expansion CA>X CA<X

monetary expansion monetary expansion causes the current account balance to increase in the short run. temporary fiscal expansion temporary fiscal expansion: There is a deterioration in the current account because the currency appreciates and income rises. permanent fiscal expansion permanent fiscal expansion: Expansionary fiscal policy reduces the current account balance. DD-AA model : DD-AA model : a real depreciation of the home currency immediately improves the current account while a real appreciation causes the current account immediately to worsen.

income is saved and spending falls on imports…the domestic demand for domestic output rises by less than the rise in output itself (since some income is saved and spending falls on imports ) DepreciationDepreciation of currency along DD to make export demand rise faster than import

Gradual trade flow adjustment & current account dynamics The J-Curve (中文展开) (中文展开) its time path If the current account initially worsens after a depreciation, its time path, has an initial segment reminiscent of a J. pre-contracted level of imports The primary effect of the depreciation is to raise the value of the pre-contracted level of imports in terms of domestic products.

These lags in adjustment …, After the current account exceed its pre- depreciation level …, Increase in CA tapers off as the adjustments to the real depreciation is completed. depresses output in the short run If expansionary monetary policy depresses output in the short run, the domestic interest rate will fall farther than it normally would.

pass-through Exchange rate pass-through & inflation Assumption: Nominal output prices P & P* can not suddenly jump… Nominal exchange rate movements affect current account in the short run. LinkageLinkagenominal exchange rateprices Linkage between the nominal exchange rate and prices of exports and imports. Linkage

Pass-through import prices home currency depreciates pass-through The percentage by which import prices rise when the home currency depreciates by one percent is known as the degree of pass-through from the exchange rate to import prices. Percentage Percentage ??? DD-AA1 completely e.g. DD-AA model: degree is 1. = any exchange rate changes is passed through completely to import prices.

incomplete Why incomplete ? market segmentation market segmentation 1.International market segmentation market segmentation imperfectly competitive firms charge different prices for the same product in different countries. wait 2. Firms wait to find out the currency movement reflects a definite trend before making price and production commitments Timing Timing 3. Timing of current account adjustment:Timing less-than- proportional 4. Currency movements have less-than- proportional effects on the relative price determining trade volumes

Korea’s Trade Balance with the U.S. and the Won/Dollar exchange rate depreciation+income cut

Skip over Page

Marshall-Lerner Condition validityThe validity of the assumption: a real depreciation of a country’s currency improves its current account. conditionDerive a condition on those responses. elastic elasticThe Marshall-Lerner condition: all else equal, a real depreciation improves the current account if export and import volumes are sufficiently elastic with respect to exchange rate. elastic

Foreign income is being held constant. Imports measured in domestic output Imports measured in foreign output unit

q the effect of a rise in q (a real export depreciation) on export demand q the effect of a rise in q (a real import depreciation) on import volume + – a real exchange rate changes 12 from time 1 to time 2 贬值幅度

△ qCAq Dividing through by △ q gives the CA response to a change in q, Volume effect > 0> 0> 0> 0 < 0 value effect

volume effectvalue effect volume effect vs. value effect Volume effectqVolume effect: the effect of change in q on the number of output unit exported and imported. Value effectqValue effect: a rise in q worsens the current account to the extent that it raises the domestic output value of the initial volume of imports.

Elasticity export elasticity of export demand import elasticity of import demand multiply its right-hand side byto express it in term of trade elasticities.

condition q the condition for an increase in q to improve the current account is initially zero depreciation elasticities It the current account is initially zero, a real currency depreciation causes a current account surplus if the sum of the relative price elasticities of export and import demand exceeds 1.

Complexity & Conclusion current account initially is non zero; qdisposable income is held constant when q changes; Conclusion of empirical study: Most countries, In the long run, a real depreciation improve the current account.