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International economics > 1 > Flashcards

1 Flashcards

1
Q

nominal exchange rate d

A

rate at which the currency of one country can be exchanged for that of another

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2
Q

Sa|b

A

amount of currency A that can currently (on the spot) be bought with 1 unit of currency B,
(direct method of quotation)

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3
Q

what is the indirect method of quotation of the exchange rate

A

from perspective of country A (home) can quote the rate in terms of the amount of currency B needed to buy 1 unit of currency A,
($1.36 needed to buy £1)

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4
Q

what is the effective nominal exchange rate

A

average of a country’s bilateral exchange rates (all previously mentioned ways of quoting ER) with an index with weights often given by trade shares (how much the country trades with different countries)

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5
Q

what are spot rates (S)

A

exchange rates for currency exchanges on the spot (for immediate delivery)

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6
Q

what are forward rates (F)

A

exchange rates for currency exchanges that will occur at a future (forward) date,
typically 30,90,180,360 days in future

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7
Q

depreciation d

A

depreciation is a decrease in the value of a currency relative to another currency

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8
Q

appreciation d

A

appreciation is an increase in the value of a currency relative to another currency

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9
Q

S£|$=0.72 –> S£|$=0.75,

has the £ depreciated or appreciated

A

£ has depreciated relative to the $, now takes more £s to buy $1, ($ appreciated relative to £)

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10
Q

why did the pound fall relative to the euro during the financial crisis

A

sterling more exposed than the euro because of the city

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11
Q

why did the pound fall relative to the dollar during the financial crisis

A

dollar is seen as safest currency so people go to it in times of economic uncertainty

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12
Q

what does a depreciated currency mean

A

imports are more expensive,

domestically produced goods and exports are less expensive

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13
Q

what is the double impact of exchange rate movements

A

on trade flows (cheaper/more expensive),

on CPI inflation

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14
Q

what is worldwide daily volume of foreign exchange transactions

A

about $5 trillion

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15
Q

what is the largest financial market in the world

A

foreign exchange markets

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16
Q

what do surveys of FX market participants suggest that 95+% of currency transactions motivated by

A

speculation
arbitrage and
international capital movements

rather than importing/exporting goods

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17
Q

arbitrage d

A

simultaneous buying and selling of securities, currency or commodities in different markets or derivative forms in order to take advantage of differing prices for the same asset

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18
Q

most transactions (85% spot deals) exchange foreign currencies for __ ______

A

US dollar

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19
Q

who are the participants in foreign exchange markets

A

commercial banks and other depository institutions,
non-bank financial institutions (hedge funds and insurance),
other businesses involved in international trade,
central banks

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20
Q

rate of return d

A

percentage change in value that an asset offers during a time period

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21
Q

liquidity d

A

ease of using the asset to buy goods/services

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22
Q

what are rates of return that investors expect determined by

A

interest rate that the asset will earn,
expectations about appreciation or depreciation,
risk

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23
Q

what is the asset approach to exchange rates *

A

exchange rate is the rate (price) of one currency against another,
an asset since a form of wealth,
its value today depends crucially on its future expected value,
forward-looking variable: any news that might change its future price must have an impact on its price today

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24
Q

what is the currency exchange rate st

A

a forward-looking variable

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25
Q

if markets are efficient what should st (current exchange rate) reflect

A 
all publicly available info about current and expected future:
domestic interest rates
foreign interest rates
risk premia
and about the future
long-run sustainable exchange rate st+N
26
Q

what is the real exchange rate *

A

Qt,

price of domestic goods relative to foreign goods

27
Q

equation for Qt (real exchange rate)

A 
Qt = (StP*t)/Pt,
log version qt = st + p*t - pt,
qt: measure of competitiveness
qt up: real depreciation increases competitiveness
(48/123)
28
Q

money market (MM) equilibrium *

A 
log version mt-pt = φyt - ηit + εt,
Mt/Pt = L(Yt,it,...)
lhs supply of real money balances
rhs demand of real money balances,
mt, pt, yt the logs of Mt, Pt, Yt,
φ,η>0 parameters and εt a zero-mean mdt shock
29
Q

what will happen in the short run when there is a permanent increase in lnmt (money),
mt-pt = φyt - ηit + εt

A

it down,
yt up,
why? price stickiness, pt adjusts slowly over time,
unanticipated announcements (news) from central banks about current and future policy can have an important impact on st,
long run all values back to long run

30
Q

what is the key national accounts macro identity

A

Y = C+I+G+CA,

CA: current account

31
Q

all else being equal what must qt up or st up (depreciation) mean

A

yt up, such that the output market is in equilibrium,
requires output to also increase, st up so yt up
yt=at+δqt+gt = at+δ(st+p*t-pt)+gt

32
Q

FOREX market equilibrium *

A

it = i*t + Etst+1 - st + pt

33
Q

what is the AA schedule equation *

A

mt-pt=φyt - η(i*t+Etst+1-st+pt) + εt,

comes from MM equilibrium and FOREX market equilibrium

34
Q

what is the basic idea of the asset approach to exchange rates

A

given perfect capital mobility, exchange rates should move to equalise the returns on equivalent assets denominated in different currencies

35
Q

what is the covered interest parity condition (CIP) *

page 1 notes

A

1+it = Ft/St(1+it),
it = it + ft - st (after taking logs)
where * denoted foreign

36
Q

what is the case when the covered interest parity (CIP) holds (page 1 notes)

A

the foreign exchange market is in equilibrium,

it should be true for any currencies that are freely traded in a world of perfect capital mobility

37
Q

what does it mean if in the CIP equation: ft-st=it-it, it-it>0 (<0), ft-st>0 (<0)

A

domestic currency is selling at a forward discount (premium)

38
Q

what is the uncovered interest parity condition (UIP) *

A

uncovered version of cip,
1+it = (St+1/St)(1+it)
it = it + Etst+1 - st (after logs)

39
Q

what does it mean in UIP equation: it=it+Etst+1-st, it-it>0 (<0), Etst+1-st>0 (<0)

A

domestic currency is expected to depreciate (appreciate)

40
Q

what do both the cip and uip assume

A

perfect capital mobility

41
Q

what is the augmented UIP *

A

it = i*t + Etst+1 - st + ρt,

when ρt>0 (<0), ρt denoted the risk premium (discount) associated with holding domestic currency denominated assets

42
Q

with the augmented UIP, what is the equation that shows how the spot exchange rate moves to equalise returns *

A

st = i*t - it + Etst+1 + ρt

43
Q 
what is the impact on the augmented UIP on the impact of "news" all else equal (st = i*t - it + Etst+1 + ρt)
it up,
i*t up,
Etst+1 up,
ρt up
A 
st = i*t - it + Etst+1 + ρt,
it up result in st down (appreciation,
i*t up result in st down (depreciation),
Etst+1 up result in st up,
ρt up result in st up
44
Q

by rewriting the augmented UIP for t+1 and t+2 etc what is the current exchange rate st equal too

A

st=Etst+n + EtΣi*t+n - EtΣit+n + EtΣρt+n (45/123),

essentially shows how the current exchange rate is a forward looking variable

45
Q

if markets are efficient, st should reflect all publicly available info about current and expected future…

A 
domestic interest rates,
foreign interest rates,
risk premia,
&amp; about the expected future
long-run sustainable exchange rate st+n
(all this got from rewriting for t+1, t+2 etc, 45/123)
46
Q

what is a carry trade investment strategy

A

consists of borrowing in low-interest rate currency (funding currency),
buying high-interest rate currency (investment currency)

47
Q

what are factors contributing to the depreciation of sterling since 2007

A

negative news about relative UK prospects (UK economy hit harder than trading partners due to relatively large debts and large financial sector),
higher relative inflation (lowers competitiveness unless currency depreciates),
rise in risk premia on sterling assets

48
Q

what is the output market equilibrium condition *

A 
yt=at+δqt+gt = at+δ(st+p*t-pt)+gt,
yt: log output,
qt=st+p*t-pt: real exchange rate,
gt: government spending,
at: autonomous spending independent of yt &amp; qt,
δ>0 parameter,
49
Q

when does at go up (output market equilibrium condition yt=at+δqt+gt = at+δ(st+p*t-pt)+gt),
at: autonomous spending

A

autonomous consumption, investment or exports up,

autonomous imports down and taxes down

50
Q

what is the IS-LM model

A

IS: combination of i (interest rates) and y (output) such that output market in equilibrium,
LM: combinations of i and y such that money market in equilibrium,
equilibrium jointly determines i and y

51
Q

what does it mean if qt up in output market equilibrium equation DD,
yt=at+δqt+gt = at+δ(st+p*t-pt)+gt,

A

qt up, depreciation, home goods cheaper so increase output

52
Q

what does dd show

A

all combinations of nominal exchange rates and real output levels that are compatible with equilibrium in the output market

53
Q

what is the output market DD equation

A

yt=at+δqt+gt = at+δ(st+p*t-pt)+gt,

54
Q

what is the impact of a temporary fiscal policy shock

A

adjustment starts in OM where gt increases,
this increases income and increases demand for money (ED for money) since demand for money depends positively on income,
equilibrium in MM re-established by rise in i,
nominal appreciation of home currency spills over to OM via a worsening of current account

55
Q

what is the key distinction between gt and mt shocks

A

both expansionary cause rise in output,
monetary results in currency depreciation and improvement in CA,
fiscal produces currency appreciation and worsening of CA

56
Q

what is the impact of a permanent fiscal policy shock

A

LR OM equil condition: ybar=abar+δqbar+gbar,
g increases permanently, ED for output by gov appreciates currency, which reduces exports and increases imports,
due to output being determined on the supply side in the long run (ybar=abar+δqbar+gbar) ybar independent of g so g rise must crowd out the CA (see above)
(q down, appreciation)

57
Q

what is the ceteris paribus impact on the current account (CA=EX-IM) of a depreciation of domestic currency if all measured in domestic

A

CA down = EX - IM down,

does not affect volume of imp or exp but makes imp more expensive

58
Q

who talked about the nominal exchange rate, the UIP, and PPP

A

Baillie (2008)

59
Q

what was the original paper bringing in uip, money demand, DD curve, real exchange rate

A

Dornbusch (1976)

60
Q

what kind of shocks does a flexible exchange rate and fixed ER insulate an economy from

A

flexible protects from real shocks to AD,
fixed ER insulates economy from money supply and demand shocks,
source and nature of shock (temp or permanent)

International economics (6 decks)

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