上财国际金融系主任金洪飞国际金融课件Chapter-16

Chapter16

OUTPUTANDTHEEXCHANGERATEINTHESHORTRUN

Chapter16combinesthetheoryofexchangeratedeterminationwiththetheoryofoutputdeterminationintheshortrun.7/30/20231

LecturedbyDrJinHongfei

Chapter16

OUTPUTANDTHEEXIntroductionThemodeldevelopedinthischaptertakesintoaccountthefactthatchangeexchangerates,interestratesandpricelevelsmayalsoaffectoutput(i.e.,outputisendogenouslydetermined).Therefore,itgivesusamorecompletepictureofhowmacroeconomicchangesaffectanopeneconomy.7/30/20232

LecturedbyDrJinHongfei

IntroductionThemodeldevelopeOverviewThegoodsmarketandaggregatedemandGoodsmarketequilibrium:DDcurveAssetmarketequilibrium:AAcurveOverallequilibriumPolicyanalysiswiththemodel7/30/20233

LecturedbyDrJinHongfei

OverviewThegoodsmarketandaDeterminantsofAggregate

DemandinanOpenEconomyAggregatedemandTheamountofacountry’sgoodsandservicesdemandedbyhouseholdsandfirmsthroughouttheworld. D=C+I+G+CAForsimplicity,weassumethatIandGareexogenouslydetermined.7/30/20234

LecturedbyDrJinHongfei

DeterminantsofAggregate

DemDeterminantsofConsumptionDemandConsumptiondemandincreasesasdisposableincome(i.e.,nationalincomelesstaxes)increasesattheaggregatelevel.C=C(Yd),whereYd=Y–T(Yd=

disposableincome),Theincreaseinconsumptiondemandislessthantheincreaseinthedisposableincomebecausepartoftheincomeincreaseissaved.DeterminantsofAggregate

DemandinanOpenEconomy7/30/20235

LecturedbyDrJinHongfei

DeterminantsofConsumptionDeDeterminantsoftheCurrentAccountTheCAbalanceisviewedasthedemandforacountry’sexports(EX)lessthatcountry'sowndemandforimports(IM).TheCAbalanceisdeterminedbytwomainfactors:Thedomesticcurrency’srealexchangerateagainstforeigncurrency(q=EP*/P)Domesticdisposableincome(Yd)CA=CA(q=EP*/P,Yd=Y–T)DeterminantsofAggregate

DemandinanOpenEconomy7/30/20236

LecturedbyDrJinHongfei

DeterminantsoftheCurrentAcHowdochangesinDisposableIncomeaffecttheCurrentAccount?Anincreaseindisposableincomeincreasesdomesticconsumers’spendingonallgoods,includingimportsfromabroad.Thatwillleadtoadecreaseinthecurrentaccount.

DeterminantsofAggregate

DemandinanOpenEconomy7/30/20237

LecturedbyDrJinHongfei

HowdochangesinDisposableIHowdochangesintheRealExchangeRateaffecttheCurrentAccount?Itaffectsbothexportsandimports.AnincreaseinqraisesEXandimprovesthedomesticcountry’sCA.Eachunitofdomesticoutputnowpurchasesfewerunitsofforeignoutput,therefore,theforeigncountrywilldemandmoreexports.DeterminantsofAggregate

DemandinanOpenEconomy7/30/20238

LecturedbyDrJinHongfei

HowdochangesintheRealExcHowever,anincreaseinqcanraiseorlowerthevalueofimportsmeasuredintermsofdomesticoutput.Therefore,thefinaleffectofanincreaseinqonthecurrentaccountisAMBIGUOUS.DeterminantsofAggregate

DemandinanOpenEconomy7/30/20239

LecturedbyDrJinHongfei

However,anincreaseinqcanTherearetwoeffectsofarealexchangerate:VolumeeffectTheeffectofconsumerspendingshiftsonexportandimportquantitiesValueeffect

Itchangesthedomesticoutputworthofagivenvolumeofforeignimports.DeterminantsofAggregate

DemandinanOpenEconomy7/30/202310

LecturedbyDrJinHongfei

TherearetwoeffectsofareaWhethertheCAimprovesorworsensdependsonwhicheffectofarealexchangeratechangeisdominant.Weassumethatthevolumeeffectofarealexchangeratechangealwaysoutweighsthevalueeffect.DeterminantsofAggregate

DemandinanOpenEconomy7/30/202311

LecturedbyDrJinHongfei

WhethertheCAimprovesorworAssumingfornowthatthevolumeeffectalwaysoutweighsthevalueeffect,wehavethat:“otherthingsequal,arealdepreciationofthecurrencyimprovestheCAandarealappreciationofthecurrencyworsenstheCA”.Aswewillseelater,thisassumptionrequiresthatimportandexportdemandsberelativelyelasticwithrespecttotherealexchangerate(Marshall-LernerCondition).DeterminantsofAggregate

DemandinanOpenEconomy7/30/202312

LecturedbyDrJinHongfei

AssumingfornowthatthevoluDeterminantsofAggregate

DemandinanOpenEconomyTable16-1:FactorsDeterminingtheCurrentAccount7/30/202313

LecturedbyDrJinHongfei

DeterminantsofAggregate

DemThefourcomponentsofaggregatedemandarecombinedtogetthetotalaggregatedemand:D=C(Y–T)+I+G+CA(EP*/P,Y–T)Thisequationshowsthataggregatedemandforhomeoutputcanbewrittenas:D=D(EP*/P,Y–T,I,G)

TheEquationofAggregateDemand7/30/202314

LecturedbyDrJinHongfei

ThefourcomponentsofaggregaTheRealExchangeRateandAggregateDemandAnincreaseinqraisesCAandD.Itmakesdomesticgoodsandservicescheaperrelativetoforeigngoodsandservices.Itshiftsbothdomesticandforeignspendingfromforeigngoodstodomesticgoods.Otherthingsequal,arealdepreciationofthehomecurrencyraisesaggregatedemandforhomeoutput.Similarly,arealappreciationlowersaggregatedemandforhomeoutput.TheEquationofAggregateDemand7/30/202315

LecturedbyDrJinHongfei

TheRealExchangeRateandAggRealIncomeandAggregateDemandAriseindomesticrealincomeraisesaggregatedemandforhomeoutput.Afallindomesticrealincomelowersaggregatedemandforhomeoutput.TheEquationofAggregateDemand7/30/202316

LecturedbyDrJinHongfei

RealIncomeandAggregateDemaFigure16-1:AggregateDemandasaFunctionofOutputOutput(realincome),YAggregatedemand,DAggregatedemandfunction,D(EP*/P,Y–T,I,G)45°TheEquationofAggregateDemand7/30/202317

LecturedbyDrJinHongfei

Figure16-1:AggregateDemandHowOutputIs

DeterminedintheShortRunOutputmarketisinequilibriumintheshort-runwhenrealoutput,Y,equalstheaggregatedemandfordomesticoutput: Y=D(EP*/P,Y–T,I,G) (16-1)7/30/202318

LecturedbyDrJinHongfei

HowOutputIs

DeterminedintFigure16-2:TheDeterminationofOutputintheShortRun Output,YAggregatedemand,D45°Aggregatedemand=aggregateoutput,D=YAggregatedemand2Y2D11Y13Y3HowOutputIs

DeterminedintheShortRun7/30/202319

LecturedbyDrJinHongfei

Figure16-2:TheDeterminationHowwouldachangeinthenominalexchangerateaffectoutputmarketequilibrium?Withfixedpricelevelsathomeandabroad,ariseinthenominalexchangeratemakesforeigngoodsandservicesmoreexpensiverelativetodomesticgoodsandservices.Anyriseinqwillcauseanupwardshiftintheaggregatedemandfunctionandanexpansionofoutput.Anyfallinqwillcauseoutputtocontract.OutputMarketEquilibriumintheShortRun:TheDDSchedule7/30/202320

LecturedbyDrJinHongfei

HowwouldachangeinthenomiOutputMarketEquilibriumintheShortRun:TheDDScheduleFigure16-3:OutputEffectofaCurrencyDepreciationwithFixed OutputPrices Output,YAggregatedemand,D45°D=Y1Y1Aggregatedemand(E2)Aggregatedemand(E1)Y22Currencydepreciates7/30/202321

LecturedbyDrJinHongfei

OutputMarketEquilibriumintDerivingtheDDScheduleDDschedule

Itshowsallcombinationsofoutputandtheexchangerateforwhichtheoutputmarketisinshort-runequilibrium(aggregatedemand=aggregateoutput).Itslopesupwardbecauseariseintheexchangeratecausesoutputtorise.(IfweassumethatPandP*arefixedintheshortrun,adepreciationofthedomesticcurrencyisassociatedwithariseinY.Similarly,anappreciationofthedomesticcurrencyisassociatedwithafallinoutput.)OutputMarketEquilibriumintheShortRun:TheDDSchedule7/30/202322

LecturedbyDrJinHongfei

DerivingtheDDScheduleOutputY2DDOutputMarketEquilibriumintheShortRun:TheDDScheduleFigure16-4:DerivingtheDDScheduleOutput,Y

Aggregatedemand,DD=YY1Aggregatedemand(E2)Aggregatedemand(E1)Y2Output,Y

Exchangerate,EY11E1E227/30/202323

LecturedbyDrJinHongfei

Y2DDOutputMarketEquilibriumFactorsthatShifttheDDScheduleGovernmentpurchasesTaxesInvestmentDomesticpricelevelsForeignpricelevelsDomesticconsumptionDemandshiftbetweenforeignanddomesticgoodsAdisturbancethatraises(lowers)aggregatedemandfordomesticoutputshiftstheDDscheduletotheright(left).OutputMarketEquilibriumintheShortRun:TheDDSchedule7/30/202324

LecturedbyDrJinHongfei

FactorsthatShifttheDDScheY2OutputMarketEquilibriumintheShortRun:TheDDScheduleFigure16-5:GovernmentDemandandthePositionoftheDDScheduleD=YY1D(E0P*/P,Y–T,I,G2)D(E0P*/P,Y–T,I,G1)Y2Output,Y

Exchangerate,EY1Aggregatedemandcurves2GovernmentspendingrisesOutput,Y

Aggregatedemand,DDD1E01DD27/30/202325

LecturedbyDrJinHongfei

Y2OutputMarketEquilibriuminAAScheduleItshowsallcombinationsofexchangerateandoutputthatareconsistentwithequilibriuminthedomesticmoneymarketandtheforeignexchangemarket.AssetMarketEquilibriumintheShortRun:TheAASchedule7/30/202326

LecturedbyDrJinHongfei

AAScheduleAssetMarketEquiliOutput,theExchangeRate,andAssetMarketEquilibriumWewillcombinetheinterestparityconditionwiththemoneymarkettoderivetheassetmarketequilibriumintheshort-run.Theinterestparityconditiondescribingforeignexchangemarketequilibriumis:R=R*+(Ee–E)/E

where:Eeistheexpectedfutureexchangerate

Ristheinterestrateondomesticcurrencydeposits

R*istheinterestrateonforeigncurrencydepositsAssetMarketEquilibriumintheShortRun:TheAASchedule7/30/202327

LecturedbyDrJinHongfei

Output,theExchangeRate,andTheRsatisfyingtheinterestparityconditionmustalsoequatetherealdomesticmoneysupplytoaggregaterealmoneydemand:Ms/P=L(R,Y)AggregaterealmoneydemandL(R,Y)riseswhentheinterestratefallsbecauseafallinRmakesinterest-bearingnon-moneyassetslessattractivetohold.AssetMarketEquilibriumintheShortRun:TheAASchedule7/30/202328

LecturedbyDrJinHongfei

TheRsatisfyingtheinterestWhataretheeffectsofariseinincome(Y)onthenominalexchangerate(E)?AssetMarketEquilibriumintheShortRun:TheAASchedule7/30/202329

LecturedbyDrJinHongfei

WhataretheeffectsofariseAssetMarketEquilibriumintheShortRun:TheAAScheduleFigure16-6:OutputandtheExchangeRateinAssetMarketEquilibriumDomestic-currencyreturnonforeign-currencydepositsForeignexchangemarketMoneymarketE22'R2E11'R1RealmoneysupplyMSP1L(R,Y2)L(R,Y1)RealdomesticmoneyholdingsDomesticinterestrate,RExchangeRate,E02Outputrises7/30/202330

LecturedbyDrJinHongfei

AssetMarketEquilibriuminthForassetmarketstoremaininequilibrium:Ariseindomesticoutputmustbeaccompaniedbyanappreciationofthedomesticcurrency.Afallindomesticoutputmustbeaccompaniedbyadepreciationofthedomesticcurrency.AssetMarketEquilibriumintheShortRun:TheAASchedule7/30/202331

LecturedbyDrJinHongfei

ForassetmarketstoremaininDerivingtheAAScheduleItrelatesexchangeratesandoutputlevelsthatkeepthemoneyandforeignexchangemarketsinequilibrium.Itslopesdownwardbecauseariseinoutputcausesariseinthehomeinterestrateandadomesticcurrencyappreciation.AssetMarketEquilibriumintheShortRun:TheAASchedule7/30/202332

LecturedbyDrJinHongfei

DerivingtheAAScheduleAssetFigure16-7:TheAASchedule Output,YExchangeRate,EAssetMarketEquilibriumintheShortRun:TheAAScheduleAAY1E11Y2E227/30/202333

LecturedbyDrJinHongfei

Figure16-7:TheAASchedule FactorsthatShifttheAAScheduleDomesticmoneysupplyDomesticpricelevelExpectedfutureexchangerateForeigninterestrateShiftsintheaggregaterealmoneydemandscheduleAssetMarketEquilibriumintheShortRun:TheAASchedule7/30/202334

LecturedbyDrJinHongfei

FactorsthatShifttheAAScheFactorsthatShifttheAAScheduleIngeneral,ifthechangeleadstoanincreaseinthenominalexchangerate(currencydepreciation),theAAcurveshiftstotheright.IfthechangeleadstoafallinE(currencyappreciation),AAshiftstotheleft.AssetMarketEquilibriumintheShortRun:TheAASchedule7/30/202335

LecturedbyDrJinHongfei

FactorsthatShifttheAAScheShort-RunEquilibriumforanOpenEconomy:PuttingtheDDandAASchedulesTogetherAshort-runequilibriumfortheeconomyasawholemustbringequilibriumsimultaneouslyintheoutputandassetmarkets.Thatis,itmustlieonbothDDandAAschedules.7/30/202336

LecturedbyDrJinHongfei

Short-RunEquilibriumforanOShort-RunEquilibriumforanOpenEconomy:PuttingtheDDandAASchedulesTogetherOutputpricesarefixed(PandP*)AlsoR*andEearefixed.TheintersectionoftheDDcurveandtheAAcurveistheonlycombinationofEandYthatisconsistentbothwithequilibriuminthemarketforgoods&servicesandwithequilibriuminthemoneymarket.7/30/202337

LecturedbyDrJinHongfei

Short-RunEquilibriumforanOFigure16-8:Short-RunEquilibrium:TheIntersectionofDDandAA Output,YExchangeRate,EAAY1E11Short-RunEquilibriumforanOpenEconomy:PuttingtheDDandAASchedulesTogetherDD7/30/202338

LecturedbyDrJinHongfei

Figure16-8:Short-RunEquilibFigure16-9:HowtheEconomyReachesItsShort-RunEquilibriumAAY1E11Short-RunEquilibriumforanOpenEconomy:PuttingtheDDandAASchedulesTogetherDD3E32E2 Output,YExchangeRate,E7/30/202339

LecturedbyDrJinHongfei

Figure16-9:HowtheEconomyRShort-RunEquilibriumforanOpenEconomy:PuttingtheDDandAASchedulesTogetherHowdoestheeconomyreachitsshort-runequilibrium?Assetsmarketsadjustquickly:theexchangeratemovesfromE2toE3immediately.Theeconomythenmovestopoint1alongtheAAcurveasoutputrisestomeetaggregatedemand.7/30/202340

LecturedbyDrJinHongfei

Short-RunEquilibriumforanOTemporaryChanges

inMonetaryandFiscalPolicyTwotypesofgovernmentpolicy:MonetarypolicyItworksthroughchangesinthemoneysupply.FiscalpolicyItworksthroughchangesingovernmentspendingortaxes.Temporarypolicyshiftsarethosethatthepublicexpectstobereversedinthenearfutureanddonotaffectthelong-runexpectedexchangerate.Assumethatpolicyshiftsdonotinfluencetheforeigninterestrateandtheforeignpricelevel.7/30/202341

LecturedbyDrJinHongfei

TemporaryChanges

inMonetaryMonetaryPolicyAnincreaseinmoneysupply(i.e.,expansionarymonetarypolicy)raisestheeconomy’soutput.Theincreaseinmoneysupplycreatesanexcesssupplyofmoney,whichlowersthehomeinterestrate.Asaresult,thedomesticcurrencymustdepreciate(i.e.,homeproductsbecomecheaperrelativetoforeignproducts)andaggregatedemandincreases.TemporaryChanges

inMonetaryandFiscalPolicy7/30/202342

LecturedbyDrJinHongfei

MonetaryPolicyTemporaryChangDDFigure16-10:EffectsofaTemporaryIncreaseintheMoneySupply Output,YExchangeRate,EAA2Y2E22AA11E1Y1TemporaryChanges

inMonetaryandFiscalPolicy7/30/202343

LecturedbyDrJinHongfei

DDFigure16-10:EffectsofaTFiscalPolicyAnincreaseingovernmentspending,acutintaxes,orsomecombinationofthetwo(i.e,expansionaryfiscalpolicy)raisesoutput.Theincreaseinoutputraisesthetransactionsdemandforrealmoneyholdings,whichinturnincreasesthehomeinterestrate.Asaresult,thedomesticcurrencymustappreciate.TemporaryChanges

inMonetaryandFiscalPolicy7/30/202344

LecturedbyDrJinHongfei

FiscalPolicyTemporaryChangesDD1Figure16-11:EffectsofaTemporaryFiscalExpansion Output,YExchangeRate,EAADD2Y1E112Y2E2TemporaryChanges

inMonetaryandFiscalPolicy7/30/202345

LecturedbyDrJinHongfei

DD1Figure16-11:EffectsofaPoliciestoMaintainFullEmploymentTemporarydisturbancesthatleadtorecessioncanbeoffsetthroughexpansionarymonetaryorfiscalpolicies.Temporarydisturbancesthatleadtooveremploymentcanbeoffsetthroughcontractionarymonetaryorfiscalpolicies.TemporaryChanges

inMonetaryandFiscalPolicy7/30/202346

LecturedbyDrJinHongfei

PoliciestoMaintainFullEmplFigure16-12:MaintainingFullEmploymentAfteraTemporaryFallin WorldDemandforDomesticProducts Output,YExchangeRate,EDD1AA2AA1YfY2E22DD21E13E3TemporaryChanges

inMonetaryandFiscalPolicy7/30/202347

LecturedbyDrJinHongfei

Figure16-12:MaintainingFullDD1 Figure16-13:PoliciestoMaintainFullEmploymentAfter aMoney-DemandIncrease Output,YExchangeRate,EDD2AA1AA2YfY2E223E31E1TemporaryChanges

inMonetaryandFiscalPolicy7/30/202348

LecturedbyDrJinHongfei

DD1 Figure16-13:PoliciestoInflationBiasandOther

ProblemsofPolicyFormulationProblemsofpolicyformulation:InflationbiasHighinflationwithnoaveragegaininoutputthatresultsfromgovernments’policiestopreventrecessionIdentifyingthesourcesofeconomicchangesIdentifyingthedurationsofeconomicchangesTheimpactoffiscalpolicyonthegovernmentbudgetTimelagsinimplementingpolicies7/30/202349

LecturedbyDrJinHongfei

InflationBiasandOther

ProbPermanentShiftsin

MonetaryandFiscalPolicyApermanentpolicyshiftaffectsnotonlythecurrentvalueofthegovernment’spolicyinstrumentbutalsothelong-runexchangerate.Thisaffectsexpectationsaboutfutureexchangerates.APermanentIncreaseintheMoneySupplyApermanentincreaseinthemoneysupplycausestheexpectedfutureexchangeratetoriseproportionally.Asaresult,theupwardshiftintheAAscheduleisgreaterthanthatcausedbyanequal,buttransitory,increase(comparepoint2withpoint3inFigure16-14).7/30/202350

LecturedbyDrJinHongfei

PermanentShiftsin

MonetaryDD1Figure16-14:Short-RunEffectsofaPermanentIncreaseintheMoney Supply Output,YExchangeRate,EAA2Y2E22AA11E1Yf3PermanentShiftsin

MonetaryandFiscalPolicy7/30/202351

LecturedbyDrJinHongfei

DD1Figure16-14:Short-RunEfAdjustmenttoaPermanentIncreaseintheMoneySupplyThepermanentincreaseinthemoneysupplyraisesoutputaboveitsfull-employmentlevel.Asaresult,thepricelevelincreasestobringtheeconomybacktofullemployment.Figure16-15showstheadjustmentbacktofullemployment.PermanentShiftsin

MonetaryandFiscalPolicy7/30/202352

LecturedbyDrJinHongfei

AdjustmenttoaPermanentIncrAdjustmenttoaPermanentIncreaseintheMoneySupplyTheincreaseinpriceaffectsboththeAAcurve(throughrealmoneysupply)andtheDDcurve(throughtherealexchangerate).TheAAcurveshiftstotheleftandtheDDcurveshiftstotheleftuntiltheyintersect.NotethattheAAcurvedoesn’treturntoitsoriginalpositionbecausetheexpectedexchangerateispermanentlyhigherafterthepermanentincreaseinthemoneysupply.Youcanseethatovershootinghashappened(fromE2toE3).PermanentShiftsin

MonetaryandFiscalPolicy7/30/202353

LecturedbyDrJinHongfei

AdjustmenttoaPermanentIncrDD2Figure16-15:Long-RunAdjustmenttoaPermanentIncreaseinthe MoneySupply Output,YExchangeRate,EDD1AA2AA3Yf3E3AA1Y2E22E11PermanentShiftsin

MonetaryandFiscalPolicy7/30/202354

LecturedbyDrJinHongfei

DD2Figure16-15:Long-RunAPermanentFiscalExpansionApermanentfiscalexpansionchangesthelong-runexpectedexchangerate.Iftheeconomystartsatlong-runequilibrium,apermanentchangeinfiscalpolicyhasnoeffectonoutput.Itcausesanimmediateandpermanentexchangeratejumpthatoffsetsexactlythefiscalpolicy’sdirecteffectonaggregatedemand.PermanentShiftsin

MonetaryandFiscalPolicy7/30/202355

LecturedbyDrJinHongfei

APermanentFiscalExpansionPeAPermanentFiscalExpansionApermanentfiscalexpansionaffectstheoutputmarketbyincreasingaggregatedemandandshiftingtheDDcurvetotheright.Butitalsoaffectstheassetsmarketbyaffectingthefutureexpectedexchangerate.WiththeincreaseinG(orreductioninT),peopleanticipateanincreaseinrealmoneydemandandintheinterestrate.Thatcreatesexpectationsofacurrencyappreciation,shiftingtheAAcurvetotheleft.PermanentShiftsin

MonetaryandFiscalPolicy7/30/202356

LecturedbyDrJinHongfei

APermanentFiscalExpansionPeAPermanentFiscalExpansionNotethatwhenafiscalexpansionispermanent,theadditionalcurrencyappreciation(causedbyashiftinexchangerateexpectations)reducesthepolicy’sexpansionaryeffectonoutput.Theappreciationofthecurrency“crowdsout”aggregatedemandfordomesticproductsbymakingthemmoreexpensiverelativetoforeignproducts.PermanentShiftsin

MonetaryandFiscalPolicy7/30/202357

LecturedbyDrJinHongfei

APermanentFiscalExpansionPeAPermanentFiscalExpansion“IftheeconomystartsatLRequilibrium,apermanentchangeinfiscalpolicyhasnoneteffectonoutput.Instead,itcausesanimmediateandpermanentexchangeratejumpthatoffsetsexactlythefiscalpolicy’sdirecteffectonaggregatedemand.”PermanentShiftsin

MonetaryandFiscalPolicy7/30/202358

LecturedbyDrJinHongfei

APermanentFiscalExpansionPeDD1 Figure16-16:EffectsofaPermanentFiscalExpansionChanging theCapitalStock Output,YExchangeRate,EDD2AA1AA2Yf2E21E1PermanentShiftsin

MonetaryandFiscalPolicy37/30/202359

LecturedbyDrJinHongfei

DD1 Figure16-16:EffectsofaATemporaryFiscalExpansionAtemporaryexpansionwouldmovetheeconomytopoint3intheshortrun.Inthelongrun,theincreaseinpriceswouldmoveDDbacktoitsoriginallevel.PermanentShiftsin

MonetaryandFiscalPolicy7/30/202360

LecturedbyDrJinHongfei

ATemporaryFiscalExpansionPeMacroeconomicPolicies

andtheCurrentAccountXXscheduleItshowscombinationsoftheexchangerateandoutputatwhichtheCAbalancewouldbeequaltosomedesiredlevel.Itslopesupwardbecauseariseinoutputencouragesspendingonimportsandthusworsensthecurrentaccount(ifitisnotaccompaniedbyacurrencydepreciation).ItisflatterthanDD.7/30/202361

LecturedbyDrJinHongfei

MacroeconomicPolicies

andthMonetaryexpansioncausestheCAbalancetoincreaseintheshortrun(point2inFigure16-17).ExpansionaryfiscalpolicyreducestheCAbalance.Ifitistemporary,theDDscheduleshiftstotheright(point3inFigure16-17).Ifitispermanent,bothAAandDDschedulesshift(point4inFigure16-17).MacroeconomicPolicies

andtheCurrentAccount7/30/202362

LecturedbyDrJinHongfei

MonetaryexpansioncausestheFigure16-17:HowMacroeconomicPoliciesAffecttheCurrentAccount Output,YExchangeRate,EAAYfE11DDXX432MacroeconomicPolicies

andtheCurrentAccountCA<0CA>07/30/202363

LecturedbyDrJinHongfei

Figure16-17:HowMacroeconomiThebehaviorunderlyingtradeflowsmayinvolvedynamicelements(onthesupplyaswellasonthedemandside)thatleadtheCAtoadjustonlygraduallytoexchangeratechanges.Howwouldthepresenceofthesedynamicfactorschangethepredictionsofourmodel?GradualTradeFlowAdjustment

andCurrentAccountDynamics7/30/202364

LecturedbyDrJinHongfei

ThebehaviorunderlyingtradeTheJ-CurveItissometimesobservedthattheCAworsensafterarealcurrencydepreciationandbeginstoimproveonlysomemonthslater(contrarytotheassumptionwemadewhenderivingtheDDcurve).TheJ-Curvedescribesthet