UNISCI - Universidad Complutense de Madrid

More documents

Recommendations

Info

UNISCI Discussion Papers, Nº 33 (Octubre / October 2013) ISSN 1696-2206is constant ( R & = 0). Under the new foreign exchange system the change in domestic moneysupply is reflected only by change in domestic credit: M & = D & , therefore⎡(g − t)⎤m&=⎢− ˆ µ mm ⎥⎣ ⎦(20)where ( g − t)= ( G − T ) / µ , and m = M µ .The condition for portfolio equilibrium under the floating exchange rate system is given by:m = Λ( ˆ) µ F(21)Given the parallel market equilibrium condition still holds ( F & = 0), the dynamic system ofthe model is now represented by the equations (20) and (21). In order to reduce the systeminto a single equation we invert equation (21) and substitute it into equation (20) to get:⎡(g − t)⎤m&=⎢− Ψ(m / F)mm⎥⎣⎦(22)−1where Ψ(m / F)= ˆ, µ Ψ = Λ , Ψ′ < 0Since [( g − t) / m] = M&/ M , we denote the growth in domestic nominal money (or domesticcredit expansion) by η (t)so that equation (22) can be expressed as:m&= [ η(t)− Ψ(m / F)]m(23)When domestic credit expands at a constant rate 11 η ( t ) = η.Equation (23) represents the evolution of domestic money growth under a floating exchangerate system, and it indicates that in the steady-state ( m& = 0)the rate of exchange ratedepreciation is identical to domestic credit expansion: 12ˆ *µ = η(24)11 The condition of constant rate of domestic credit expansion is crucial for existance of stable equilibrium valuesof the state variables, M, F, and π .12 The size of the public deficit (g-t) or domestic credit expansion does not change between the two regimes offoreign exchanges because there is no effective open market operations that allows the government to adjust itsstock of money supply according to its reserve level. In otherwords, the government is always a buyer of foreigncurrency, not a seller of foreign currency.150
UNISCI Discussion Papers, Nº 33 (Octubre / October 2013) ISSN 1696-2206Equation (24) predicts that if a fiscal deficit persists after the liberalization of foreignexchange system, depreciation of foreign exchange rate will be identical to domestic creditexpansion.5. Concluding RemarksThe macroeconomic model employed in this paper is designed to mimic small openeconomies enduring political uncertainty arising from country splitting into two independentparts. The findings in the paper indicate that the stabilization of foreign exchange rates at thepost-secession era depends on political stability in the country, which will impact on foreigncurrency inflows to the country. Our model predicts that if political unrest continues after thesplit of the country, then foreign currency reserves at the Central Banks of either country willdwindle over time, which may lead to domestic currency depreciation in terms of hardcurrencies. The model also predicts that an expanding budget deficit and declining CentralBank reserves will eventually force the government to abandon a fixed exchange rate systemin favor of a more flexible exchange rate system that resulting in further acceleration of boththe domestic inflation rate and the domestic money growth rate. As a result, the postsecessionperiod is likely to be characterized by economic instability and political unrest inthe two sides unless economic cooperation between the two countries is maintained.151
Page 1 and 2:
ISSN 1696-2206 Nº 33 Octubre /Octo
Page 3 and 4:
Juan Emilio CheyreDirector, Center
Page 5 and 6:
UNISCI Discussion Papers, Nº 33 (O
Page 7 and 8:
Page 9 and 10:
Page 11 and 12:
Page 13 and 14:
Page 15 and 16:
Page 17 and 18:
Page 19 and 20:
Page 21 and 22:
Page 23 and 24:
Page 25 and 26:
Page 27 and 28:
Page 29 and 30:
Page 31 and 32:
Page 33 and 34:
Page 35 and 36:
Page 37 and 38:
Page 39 and 40:
Page 41 and 42:
Page 43 and 44:
Page 45 and 46:
Page 47 and 48:
Page 49 and 50:
Page 51 and 52:
Page 53 and 54:
Page 55 and 56:
Page 57 and 58:
Page 59 and 60:
Page 61 and 62:
Page 63 and 64:
Page 65 and 66:
Page 67 and 68:
Page 69 and 70:
Page 71 and 72:
Page 73 and 74:
Page 75 and 76:
Page 77 and 78:
Page 79 and 80:
Page 81 and 82:
Page 83 and 84:
Page 85 and 86:
Page 87 and 88:
Page 89 and 90:
Page 91 and 92:
Page 93 and 94:
Page 95 and 96:
Page 97 and 98:
Page 99 and 100: UNISCI Discussion Papers, Nº 33 (O
Page 149: UNISCI Discussion Papers, Nº 33 (O
Page 201 and 202:
Page 203 and 204:
Page 205 and 206:
Page 207 and 208:
Page 209 and 210:
Page 211 and 212:
Page 213 and 214:
Page 215 and 216:
Page 217 and 218:
Page 219 and 220:
Page 221 and 222:
Page 223 and 224:
Page 225 and 226:
Page 227 and 228:
Page 229 and 230:
Page 231 and 232:
Page 233 and 234:
Page 235 and 236:
Page 237 and 238:
Page 239 and 240:
Page 241 and 242:
Page 243 and 244:
Page 245 and 246:
show all

UNISCI - Universidad Complutense de Madrid

Create successful ePaper yourself

Delete template?

Save as template?