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International monetary trade ecn 606 > chap 3 > Flashcards

chap 3 Flashcards

1
Q

What is loop?

A

Identical goods must be sell for the same price when prices are express in common currency

a state in absence of trade friction , free competition and price flexibility

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2
Q

what is PPP (Purchase power parity )?

A
  • macro economic counter part of loop

- it is relative to a basket of goods (not individual - loop)

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3
Q

what is the real exchange rate?

A

the relative price of basket relative with one country to another

(it tell us how many US basket are need to buy EU basket )

new terminology: real depreciation and real appreciation

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4
Q

what is the difference of exchange rate and real ER compare to currencies?

A

For currencies the real exchange rate is REAL CONCEPT

The exchange rate is nominal

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5
Q

Absolute PPP and Real exchange rate

A

PPP states that Real ER rate = 1

new terminology : undervalued , overvalued

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6
Q

Absolute PPP and the nominal exchange rate

A

Purchasing power parity implies that the exchange rate at which two currencies trade equals the relative price levels of the two countries

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7
Q

what is the relative PPP?

A

it is the rate of depreciation of the nominal exchange rate equals the difference between the inflation rates of 2 countries

^E($/e) = ( inflation US) - (Inflation - EU)

^E($/e) is rate of depreciation of nominal ER

( inflation US) - (Inflation - EU) is inflation differential

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8
Q

what explain deviations in the PPP?

A

translations cost

non traded goods

imperfect competition and legal obstacles

stickiness price

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9
Q

for how long the PPP deviations last ? (usually )

A

it is called: 4 - year half life

-rule of thumbs as guide to forecasting real exchanges rates

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10
Q

what is money ?

A
  • store of value
  • unit of account
  • medium of exchange
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11
Q

what determines the price levels of countries?

A

In the long run, by relative demand and supply of money

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12
Q

Formula Quantity theory of money

A

demand for money = constant + nominal income

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13
Q

Formula Demand for real money balances:

A

Demand for real money = constant + real income

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14
Q

Formula of equilibrium ion the money market

A

Money supply (M) = nominal demand for money
(L x P x Y )
Y: real income
P: price level
L: constant

Real money supply (M/P) = real money demand (L x Y )

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15
Q

the rate in hyperinflation :

A

inflation rise more than 50% per month

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16
Q

Most important failure of PPP :

A

Hyperinflation

17
Q

what is P x Y in the general model for demand for money:

A

Nominal income (P x Y )

P: price level
Y : real income

18
Q

what is Md/P in the general model for demand for money:

A

demand for real money

M: money demand
P: price level

19
Q

what is M/P in the long run equilibrium ?

A

Real money supply

M: money suplly
P: price level

20
Q

what is the fisher effect ?

A

A rise in the inflation rate in a country will lead to an equal rise in its nominal interest rate

nominal interest rate differential = nominal inflation rate differential (expected )

21
Q

what is real interest parity ?

A

when the PPP and UIP ( LOOP + ER ) hold, then expected real interest rate are equal across countries

22
Q

what is UIP ?

A
  • It is uncovered interest rate parity

LOOP + ER

loop: law of one price
ER : exchange rate

23
Q

what is L x Y in the general model?

A

it is Relative real money demand (L x Y)

24
Q

General model : (all equations)

A

ER = Ratio price levels (Pu/Pe) = Relative nominal money supply / relative real money demand

25
Q

Relative money supply formula :

A

Mus / Meu

divide the money supply of 2 countries

26
Q

Relative real money demand :

A

Lus x Yus / Leu x Yeu

divide the real money demand of 2 countries

27
Q

formula fisher effect

A

I $ - I e = e. pi us - e pi eu

I $ - I e , mean nominal interest rate

e. pi us - e pi eu, mean nominal inflation rate
e. pi: expected inflation

nominal interest rate = nominal inflation rate (expected)

28
Q

how many nominal anchor exist ? and name

A
  • ER target
  • Inflation target + interest parity rate policy
  • Money supply target
29
Q

what is the ER Target ? (nominal anchor)

A

It is a policy focus in achieving an inflation target through manipulation of the exchange rate

( rate of depreciation is the anchor)

30
Q

what is the ER target formula ?

A

Inflation = rate of depreciation + foreign inflation

pi h = ( ^ E (h/f) // E (h/f) ) + pi f

pi h : home inflation
pi f : foreign inflation
E (h/f) : ER
^ E (h/f): Relative ER (average)

31
Q

what is the money supply target ?

A

It is a policy to control inflation through manipulation of the money supply

(the anchor is the money supply growth)

32
Q

what is the money supply target formula?

A

inflation = money supply growth - Real output growth

33
Q

what is the inflation target + interest parity rate policy?

A

It is a policy to control inflation through manipulation of the interest rate (global and individual )

(the anchor variable is the nominal interest rate)

34
Q

what is the formula for inflation target + interest parity rate policy?

A

Expected inflation = nominal interest rate - world real interest rate

35
Q

what is a monetary regime ?

A

Long run nominal anchoring and short run flexibility

36
Q

when the PPP is weak ?

A

in the short run : deviations in the ER

and failure is :

  • market friction
  • imperfections that limit arbitrage
  • price stickiness
37
Q

what explains the quantity theory ? (or simple monetary model>?

A

Price levels in terms of money supply and Real income

and PPP explains ER in terms of price levels

the combination develop a monetary approach to ER

38
Q

PPP + uncovered interest parity

A

strong implications of the FISHER EFFECT

39
Q

fisher effect summary:

A

Local inflation rate influence nominal interest rate

therefore, interest rate should be equalizer ( at least in the long run )

International monetary trade ecn 606 (9 decks)

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