国际金融 Chapter 5.docx

Chapter fiveWhat determines exchange rates?Three types of variability after early 1970s. Long-term trends Medium-term trends (over periods of several years) Short-term trends (day to day, min to min)一、A road map1. Exchange rates in the short run: Must focus on the perceptions and actions of international financial investors Causes: international trade; positioning or repositioning of the currency composition of the portfolios of international financial investors Asset market approach to exchange rates汇率的资产市场理论-emphasize the role of positioning or repositioning by international financial investors Demand and supply shift Concept of uncovered interest parity: EUD= (eex e) / e+ (if i) the value of a foreign currency will go up when there is：a) A rise in the foreign interest rate (if) relative to domestic interest rate;b) A rise in the expected future spot exchange rate (eex );2. long-term trends: difference in national rates of inflation of the prices of goods and services. Purchasing power parity (PPP)购买力平价3. the role of money as a determinant of national product price levels and inflation rates. Monetary approach to exchange rates: emphasizes the importance of money supplies and demands as key Major conclusion-the spot exchange rate e is raised in the long run by: rise in our money supply; rise in foreign real domestic product4. one way in which the short term flows into the medium term and then into the long term overshooting汇率超调-to change more than seems necessary in reaction to changes in government policies or to other important economic or political news(in the short run) toward its long-run fundamental value二、Exchange rates in the short run1. asset market approach to exchange rates汇率的资产市场理论2. Return on an uncovered investment in a bond denominated in a foreign currency by: 1)the basic return on the bond itself; 2)the expected gain or loss on currency exchanges3. Return on home-currency bonds & the expected overall return on foreign-currency bonds will tend to be equal.(differences in two returns will cause international financial investors to reposition portfolios and creates pressures that move two returns toward equality)4. Determinants of the exchange rate in the short runu The role of interest ratesa) i升domestic bonds return升demand for domestic currency升current spot exchange rate升(e降)b) i-if升domestic-currency bonds return升domestic currency升(e降)u The role of the expected future spot exchange rate1. expected future spot exchange rate升foreign currency升foreign-currency bonds return升demand for foreign currency 升e升外币升值和本币贬值2. bandwagon effect顺势效应-some investors regarding the near-term future may expect that the recent trend in the exchange rate will continue into the future.3. Sometimes be destabilize if regardless to these economic fundamentals经济基本面三、The long run: purchasing power parity(PPP)购买力平价Economic fundamentals经济基本面 become dominant, providing an anchor for the long-term trends.u The law of one price一价定律-a product freely traded in a perfectly competitive global market should have the same price expressed in the same currency everywhereP = Pf e1. The law work well for heavily traded commodities but it does not hold closely for most products that are traded internationally, including nearly all manufactured products. Because international transport、governments do not practice free trade、markets are imperfectly competitive、firms use price discrimination to increase profitsu Absolute purchasing power parity绝对购买力平价-a basket or bundle of tradable products will have the same cost in different countries if the cost is stated in the same currency（某时点）P = Pf eThe absolute PPP: e = P/PfWhere,P: a basket of products measured in domestic currencyPf : a basket of products measured in foreign currencye: domestic currency/foreign currency1. If the law of one price holds for all the products, then absolute PPP will also hold (as long as the product bundle is the same in both countries)2. For traded products: Large divergences from absolute PPP do tend to shrink over time.u Relative purchasing power parity相对购买力平价-the difference between changes over time in product-price levels in two countries will be offset by the change in the exchange rate over this time1. Exact: 2. Approximate: the rate of appreciation of the foreign currency= = f and f：inflation rates3. Each ratio in parentheses shows the increase from the initial year to the later year for each variable.4. Relative PPP holds if absolute PPP holds for both the initial year and the later year.5. low inflation rates currencies appreciate in the foreign exchange market6. imply: each 1% more of a countrys inflation per year tends to be related to a 1% faster rate of depreciation of the countrys currency per year, given the inflation rate in the other country.u Relative PPP: evidence四、The long run: the monetary approach货币分析法Money supply(or its growth rate) determines the price levelu Money, price levels, and inflation1. Quantity theory equation: Ms = k P Y And Msf = kf Pf YfMs: money supply (controlled by governments monetary policy alone)P: price levelY: real domestic products (real GDP)Nominal GDP= P Yk: the proportional relationships between money holdings货币持有量and the nominal value of GDP；represent peoples behavior；assume to be constant2. ratio of prices between countries: e= u Money and PPP combined1. Prediction of exchange rates: e= 2. To qualify the percent effects of changes in money supplies (key elasticities are 1). If :a) 1% rise in Msb) 1% drop in Msfc) 1% drop in Yd) 1% rise in Yfthen e rises by 1%u the effect of money supplies on an exchange rateSupply of , harder to borrow and spend, aggregate demand in Britain , output & jobs; Overtime, products price Pf; with lower products price, e u the effect of real incomes on an exchange rate 1. reasons: a) supply-side-ability to produce more with its limited resources strengthenb) demand-side-extra government spending or othe aggregate-demand shift not sure五、Exchange rate overshooting汇率超调-in the short run the actual exchange rate overshoots its long-run value and then reverts back toward it.六、How can we predict exchange rates?Why difficult to predict exchange rates using eco models?1) e reacts strongly and immediately to new information2) e expectations can be formed without much reference to eco fundamentals.If simply without-bubble投机泡沫七、Extension: four exchange rate value of a currency1. nominal bilateral exchange rate-ones quoted in the foreign exch