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International monetary trade ecn 606 > Chap 4 > Flashcards

Chap 4 Flashcards

1
Q

What assumption are used in the short run ER?

A
  • Prices Stickiness

The assets Approach to ER is valid

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2
Q

what are the known input for ER? (exogenous variables)

A
  • HOME nominal interest rate
  • FOREIGN nominal interest rate
  • Expected future exchange rate
  • ER have unknown variables (endogenous variables)
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3
Q

What happens when the central bank change the money supply from constant to an expansionary ? (Long run - Short run)

A
  • 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
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4
Q

What the Assets approach state in the short-run ?

A
  • Accounts in different currencies may offer different interest rate
  • Currencies may be expected to depreciated or appreciated
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5
Q

What are the main methodology used in the world of exchange rate ?

A
  • Economic fundamentals
  • Politics
  • Technical methods
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6
Q

What determine the nominal interest rate in the short run ? (money market equilibrium )

A
  • Money supply

- Real Income

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7
Q

what arbitrage determine in the Foreign exchange (FX)?

A
  • It determine today’s spot ER

- and it confirm that the foreign market (FX) is in equilibrium (when uncovered interest parity holds)

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8
Q

What is the Asset approach to exchange rates?

A
  • 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.
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9
Q

When can monetary approach be used in the long run ?

A
  • 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

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10
Q

What happens with a permanent home expansion ?

A
  • 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

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11
Q

Does overshooting help to resolve imperial behaviour in the short - long run ?

A
  • Yes, it is one variable that explain the volatile ER

- It is a response to possible permanent shock

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12
Q

what is the trilemma ?

A
  • It is a macroeconomic problem in which result mathematically impossible to achieve tree policy goals such as :
  • Capital control
  • Floating Exchange rate
  • Monetary autonomy
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13
Q

what is nominal rigidity ?

A
  • It is the assumption of sticky prices
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14
Q

What monetary approach state in the long run ?

A
  • 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
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15
Q

What happens with a temporary HOME EXPANSION ?

A
  • Its falls HOME interest rates
  • The HOME ER decrease

This temporary policy is consistent with a nominal anchor inn the long run

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16
Q

what are the main assumptions in the money market equilibrium in the short run ?

A
  • Nominal rigidity (sticky prices)

- Fully flexible nominal interest rate

17
Q

in the assumption that DR = FR (rates)

why is important capital mobility ?

A
  • 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

18
Q

What happens with exchange rate under a float ? (in the short run )

A
  • 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 )
19
Q

what are the two main ideas of exchange rate ?

A
  1. Arbitrage
  2. Expectation

(for the cases of floating ER )

20
Q

What assumptions are are made in the long run ER ?

A
  • Prices are flexible

- Monetary approach is valid

21
Q

Is overshotting consistent with PPP ?

A
  • 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
22
Q

Reason for overshooting to investor

A
  • Exchange rate are volatile in the short run

for that reasons investor put info into their short run podcast

23
Q

What happens with exchange rate under a fixt ? (in the short run )

A
  • 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

International monetary trade ecn 606 (9 decks)

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