Exchange Rate Economics: Theories and Evidence

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The sticky-price monetary model 121 s p =0 SP s =0 O p Figure 5.9 The dynamic behaviour of the exchange rate and price level,when the exchange rate is a deflator of real money balances. sloped 45 ◦ line: for the goods market equilibrium an increase in the exchange rate requires an equal increase in p to maintain competitiveness constant and ensure no excess demand. The locus of s and p satisfying ṡ = 0 in (5.26) will clearly be negative. Thus on setting ṡ = 0 in (5.26) and,on rearranging,we obtain: p = 1 α 0 [m − (1 − α 0 )s − α 1 y + α 2 i ∗ ],(5.28) which clearly shows the negative relationship between p and s when ṡ = 0. The economic intuition behind this is that from a position where the domestic interest rate equals the foreign rate,and therefore ṡ = 0,an increase in the price level requires a reduction in s to maintain real balances,and therefore i,constant. The horizontal arrows point towards the ṗ = 0 schedule for the reasons given earlier, and the vertical arrows point away from the ṡ = 0 schedule because,from a point on the ṡ = 0 schedule,a rise in s means that real money balances have fallen,the domestic interest rate is above the foreign rate and the exchange rate must be expected to depreciate (below the ṡ = 0 locus the domestic interest rate is below the foreign rate and the exchange rate is expected to appreciate). Consider now the effects on the phase diagram in Figure 5.9 of an oil discovery. In terms of this version of the SPMA model one can distinguish the adjustments from the old to new equilibrium depending on whether the impact of oil is stronger in the goods market or in the money market,as portrayed in Figure 5.10. On the discovery of oil the exchange rate jumps from A on to the new saddle-point path at B and continues to appreciate towards the new equilibrium at C. Thus with a strong wealth effect in the aggregate demand function the relative price of domestic
122 The sticky-price monetary model s p =0 A Y B X s =0 C p = 0 (new) s = 0 (new) O p Figure 5.10 Goods market wealth effect dominates money market wealth effect. s p =0 A SP 1 p =0 (new) s =0 C B s = 0 (new) SP 2 O p Figure 5.11 Money market wealth effect dominates goods market wealth effect. output must rise,which with sticky prices in the short term can only be achieved by a (sharp) exchange rate appreciation. The latter,since it is part of the deflator of nominal money balances,increases real money balances,lowers the domestic interest rate requiring,via (5.26),a continuing exchange rate appreciation as we move out of the short-run period. Outwith the short-run period the effect on demand of the increased oil wealth results in a steadily rising price level to the new equilibrium at C. Figure 5.11 illustrates the situation where the oil discovery dominates the demand for money. The exchange rate again appreciates from
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Exchange Rate Economics Exchange Ra
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Firstpublished2007 by Routledge 2Pa
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Contents List of figures List of ta
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Figures 1.1 The balance of payments
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Figures 13.6 Fourth generation spec
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Preface This book is the second edi
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2 Introduction Although the textboo
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4 Introduction (orders to buy/sell
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6 Introduction Table 1.3 Currency d
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8 Introduction a truly flexible exc
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10 Introduction this has to be sati
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12 Introduction likely that the rel
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14 Introduction or F (1 + i) = S (1
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16 Introduction Consider now a fall
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18 Introduction The empirical evide
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20 Introduction (mean and variance)
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22 Introduction (a) (b) 0.3 0.25 0.
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24 Introduction clusters or that it
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26 Introduction 0.1 0.05 0 -0.05 -0
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28 Introduction 1.9 Exchange rate r
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30 Introduction fixed versus flexib
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32 Introduction influences. For exa
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34 Introduction 1.11 The determinan
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36 Introduction In the standard OCA
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38 Introduction most transactions i
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40 Purchasing power parity and the
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3 The economics of the PPP puzzle I
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Page 123 and 124: 108 The sticky-price monetary model
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Page 149 and 150: 6 The monetaryapproach to the excha
Page 151 and 152: 136 Empirical evidence on the monet
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Page 181 and 182: 7 Currencysubstitution models and t
Page 183 and 184: 168 Currency substitution and portf
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172 Currency substitution and portf
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200 Real exchange rate determinatio
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228 Equilibrium exchange rates rate
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230 Equilibrium exchange rates A nu
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232 Equilibrium exchange rates long
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234 Equilibrium exchange rates 5.1
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236 Equilibrium exchange rates term
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238 Equilibrium exchange rates 0.30
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240 Equilibrium exchange rates Detk
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242 Equilibrium exchange rates US i
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244 Equilibrium exchange rates The
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246 Equilibrium exchange rates 9.6.
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248 Equilibrium exchange rates 9.6.
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250 Equilibrium exchange rates Conc
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252 The new open economy macroecono
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11 The new open economy macroeconom
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290 Target zone models 12.1 The bas
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292 Target zone models stochastic c
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294 Target zone models moves from 2
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296 Target zone models where A 1 an
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298 Target zone models expected dev
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300 Target zone models % expected d
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302 Target zone models MacDonald (2
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304 Target zone models for the DM-l
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306 Target zone models explicit ban
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308 Target zone models Table 12.1 F
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310 Target zone models short-term i
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312 Target zone models the UK short
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314 Speculative attack models and c
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340 Market microstructure approach
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15 Spot and forward exchange rates
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Notes 1 Introduction: some basic co
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398 Notes 4 Although the split betw
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400 Notes 3 The fact that the utili
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402 Notes 15 This result is familia
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404 Notes 6 Where ∫ ∞ vg(v) E(v
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406 References Artis,M. and M. Lewi
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408 References Bergin,P.,R. Glick a
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410 References Calvo,G.A. and C.A.
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412 References Clark,P.B. and R. Ma
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414 References Detken,C.,A. Dieppe,
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416 References Edwards,S. and I. Ma
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418 References Fischer,S. (2001),
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420 References Frieden,J.P.G. and E
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422 References Granger,C.W. and T.
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424 References Hooper,P. and J. Mor
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426 References Kearney,C. and R. Ma
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428 References Lewis,K. (1988),‘T
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430 References MacDonald,R. (2002),
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432 References Mark,N.C. (2001),Int
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434 References Obstfeld,M. and K. R
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436 References Roll,R. (1979),‘Vi
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438 References Tauchen,G.E. and M.
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Index Abadir,K. 389 Abuaf,N. 60 Adl
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442 Index Diba,B. 177-8 Dickey,D.A.
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444 Index Gagnon,J. 212 Gali,J. 128
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446 Index Miller,M.H. 120,123,128,1
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448 Index purchasing power parity (
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450 Index trade: interbank trade 34
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Exchange Rate Economics: Theories and Evidence

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