Chap 4 Flashcards
What assumption are used in the short run ER?
- Prices Stickiness
The assets Approach to ER is valid
what are the known input for ER? (exogenous variables)
- HOME nominal interest rate
- FOREIGN nominal interest rate
- Expected future exchange rate
- ER have unknown variables (endogenous variables)
What happens when the central bank change the money supply from constant to an expansionary ? (Long run - Short run)
- If this expansion is expected to be PERMANENT (long run), the HOME INTEREST RATE RISE.
- If this expansion is expected to be temporary, the short run effect is that the HOME INTEREST RATE FALL
What the Assets approach state in the short-run ?
- Accounts in different currencies may offer different interest rate
- Currencies may be expected to depreciated or appreciated
What are the main methodology used in the world of exchange rate ?
- Economic fundamentals
- Politics
- Technical methods
What determine the nominal interest rate in the short run ? (money market equilibrium )
- Money supply
- Real Income
what arbitrage determine in the Foreign exchange (FX)?
- It determine today’s spot ER
- and it confirm that the foreign market (FX) is in equilibrium (when uncovered interest parity holds)
What is the Asset approach to exchange rates?
- It is based on the idea that currencies area assets (store of value)
- The price of the assets in the case is the spot exchange rate and the price of one unit of foreign exchange.
When can monetary approach be used in the long run ?
- It can be used to forecast the long-run future expected ER
- which, in turn , feeds back into the short-run ER via the UIP equation
What happens with a permanent home expansion ?
- Home Interest rate FALL
- Home ER depreciated
In the short run, overshoot ER, what will eventually be in the long run
This permanent policy is inconsistent with a nominal anchor in the long run
Does overshooting help to resolve imperial behaviour in the short - long run ?
- Yes, it is one variable that explain the volatile ER
- It is a response to possible permanent shock
what is the trilemma ?
- It is a macroeconomic problem in which result mathematically impossible to achieve tree policy goals such as :
- Capital control
- Floating Exchange rate
- Monetary autonomy
what is nominal rigidity ?
- It is the assumption of sticky prices
What monetary approach state in the long run ?
- That purchase power parity (PPP) holds
- Therefore , ER = ratio of price levels (between countries)
- In turn , each price levels depends on the RATIO of MONEY SUPPLY to MONEY DEMAND in each country
What happens with a temporary HOME EXPANSION ?
- Its falls HOME interest rates
- The HOME ER decrease
This temporary policy is consistent with a nominal anchor inn the long run
what are the main assumptions in the money market equilibrium in the short run ?
- Nominal rigidity (sticky prices)
- Fully flexible nominal interest rate
in the assumption that DR = FR (rates)
why is important capital mobility ?
- Capital mobility is crucial for the assumption DR = FR because both depend on it
- If there is capital control, then no arbitrage , therefore no reason for DR = FR
DR: domestic rate
FR: foreign rate
What happens with exchange rate under a float ? (in the short run )
- The home monetary authorities pick the money supply M.
- In the short run : the choice of money supply determine the INTEREST RATE and UIP determine ER
- Money supply is input exogenous variable
- ER is an output model (endogenous variable )
what are the two main ideas of exchange rate ?
- Arbitrage
- Expectation
(for the cases of floating ER )
What assumptions are are made in the long run ER ?
- Prices are flexible
- Monetary approach is valid
Is overshotting consistent with PPP ?
- Yes, it is consistent
- investment forecast: the expected exchange rate based on the theory of PPP
- When there is some change in the market, the investor know the exchange rate will change to EQUATE relative prices in the long run
Reason for overshooting to investor
- Exchange rate are volatile in the short run
for that reasons investor put info into their short run podcast
What happens with exchange rate under a fixt ? (in the short run )
- Home monetary authorities pick the ER
- In the short run : fixed ER determine hone interest rate , then interest rate determine money demand
- ER is exogenous variable
- Money supply is an endogenous variable
