A Road Map
What Determines Exchange Rates?
- What Determines Exchange Rates?
Chapter 19
What Determines Exchange Rates?
What Determines Exchange Rates? Since the general shift to floating exchange rates in the early 1970s, exchange rates between the U.S. dollar and other major currencies have been variable or volatile. The charts at the beginning of the chapter suggest three types of variability. First, there are long-term trends in which some currencies tend to appreciate against the dollar, and others tend to depreciate. Second, there are medium-term trends which are sometimes counter to the longer trends.
Slide17
知识点8
案例4
习题60
Knowledge Points
知识点
Exchange Rates in the Short Run
Since the general shift to floating exchange rates in the early 1970s, exchange rates between the U.S. dollar and other major currencies have been variable or volatile. The charts at the beginning of the chapter suggest three types of variability. First, there are long-term trends in which some currencies tend to appreciate against the dollar, and others tend to depreciate.
- Pressures on exchange rates in the short run can be best understood in terms of the demands and supplies of assets denominated in different currencies
- Foreign exchange markets seems sensitive to movements in interest rates
- Expectations of future exchange rates can have a powerful impact on international financial positioning, and thus on the value of the current exchange rate
The Long Run: The Monetary Approach
Combining PPP and the quantity theory equations for two countries, we obtain a basis for the monetary approach to explaining or predicting exchange rates in the long run: e = P/Pf = (Ms/Msf)(kf /k)(Yf /Y). If the ratio of the k's is steady, then the exchange rate will change over the long run as the money supplies change and as real GDPs grow, with elasticities of one.
- Emphasizes the importance of money supplies and demands as keys to understanding the determinants of exchange rates, through the link of money to price levels and inflation rates.
- The exchange-rate value of a foreign currency (
- ) is raised in the long run by the following:
The Long Run: Purchasing Power Parity (PPP)
The chapter then examines long trends in exchange rates. Our understanding of exchange rates in the long run is based on the purchasing power parity (PPP) hypothesis. Three versions of PPP are presented: the law of one price for a single product, absolute PPP, and relative PPP.
- Exchange rates over time
- Long-term trends
- Medium-term trends
Exchange-Rate Overshooting
During class discussion of the short-run pressures on exchange rates, inquisitive students may ask if both the interest rate (say, the domestic interest rate) and the expected future spot exchange rate change at the same time. Here is one possible way to respond. If the increase in the nominal domestic interest rate is caused by a higher expected rate of inflation, then it may also be accompanied by an expectation (based on PPP) that the domestic currency will depreciate in the future.
- International investors can react
- rationally
- to news by driving the exchange rate
How Well Can We Predict Exchange Rates?
The chapter next discusses how difficult it is to predict exchange rate movements in the short run. Generally, economic models (like the asset market approach or the monetary approach) cannot beat the naive model of a random walk, which predicts that the exchange rate in the future will simply be the same as the exchange rate today.
- The naïve model: the spot exchange rate follows a
- random walk
- , so we have no ability to predict whether it will go up or down
Introduction
What Determines Exchange Rates?
- Exchange rates over time
- Long-term trends
- Medium-term trends
Asset Market Approach to Exchange Rates
The chapter first examines short-run movements in exchange rates. It presents the version of the asset market approach to exchange rates that focuses on debt securities and the uncovered interest parity relationship developed in Chapter 18, presuming that this relationship holds approximately if not exactly. The basic discussion examines the pressure on the current spot exchange rate if one of the other three rates (the domestic interest rate, the foreign interest rate, and the expected future spot exchange rate) changes, with the other two held constant.
- Exchange rates over time
- Long-term trends
- Medium-term trends
Cases
案例与情境
2.Calculate and report the real bilateral exchange rate values (annual a ...
2.Calculate and report the real bilateral exchange rate values (annual averages) of your country's currency since 1990, relative to the U.S. dollar. If possible, use price indexes called “Producer Prices,” “Wholesale Prices,” or a similar name, even if the names are somewhat different between your country and the United States.
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2.Calculate and report the real bilateral exchange rate values (annual averages) of your country's currency since 1990, relative to the U.S. dollar. If possible, use price indexes called “Producer Prices,” “Wholesale Prices,” or a similar name, even if the names are somewhat different between your country and the United States. If there is more than one price index of this type for your country, choose the one that is most suitable. If your country does not have full data for this type of price index, then use the price index that is usually called the “Consumer Price Index” for both your country and the United States. In reporting the values of the real exchange rates, use a base year of 1990=100. [Please attach an appendix in which the methods of calculating the real exchange rates are documented.]
Price Gaps and International Income Comparisons: The list of countries i ...
Price Gaps and International Income Comparisons: The list of countries is ordered by national income per capita using common prices (sometimes called national income per capita at PPP exchange rates), as shown in the middle column of numbers. Singapore is at the top of the list because it has the highest value for this common-price income per capita.
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Price Gaps and International Income Comparisons: The list of countries is ordered by national income per capita using common prices (sometimes called national income per capita at PPP exchange rates), as shown in the middle column of numbers. Singapore is at the top of the list because it has the highest value for this common-price income per capita. Yes, national income per capita for Singapore is lower than the United States (and a number of other countries) using market exchange rates to convert national income values into the same currency, as shown in the first column. But, at those market exchange rates, Singapore has surprising low average prices for goods and services, as shown in the third column. For example, average Singapore prices are only 62 percent of the prices for the same bundle of goods and services in the United States. After we adjust for the remarkably low Singapore
11. a.If we use 1995 as the base year, the nominal ...
11. a.If we use 1995 as the base year, the nominal exchange rate of $1/pnut corresponds to a ratio of U.S. prices to Pugelovian prices of 100/100. According to PPP, this relationship should be maintained over time. If the price level ratio changes to 260/390 in 2018, then the nominal exchange rate should change to $0.67/pnut.
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11. a.If we use 1995 as the base year, the nominal exchange rate of $1/pnut corresponds to a ratio of U.S. prices to Pugelovian prices of 100/100. According to PPP, this relationship should be maintained over time. If the price level ratio changes to 260/390 in 2018, then the nominal exchange rate should change to $0.67/pnut. The pnut should depreciate during this time period because of the higher Pugelovian inflation rate (the reason why Pugelovia’s price level increased by more than the U.S. price level increased).
b.For the United States, the quantity theory of money with a ...
b.For the United States, the quantity theory of money with a constant k means that the quantity equation with k = 0.25 should hold in 2018: 65,000 = 0.25 260 1,000. It does. Because the quantity equation holds for both years with the same k, the change in the price level from 1995 to 2018 is consistent with the quantity theory of money with a constant k.
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b.For the United States, the quantity theory of money with a constant k means that the quantity equation with k = 0.25 should hold in 2018: 65,000 = 0.25 260 1,000. It does. Because the quantity equation holds for both years with the same k, the change in the price level from 1995 to 2018 is consistent with the quantity theory of money with a constant k. Similarly, for Pugelovia, the quantity equation with k = 0.5 should hold for 2018, and it does (58,500 = 0.5 390 300).
Exercises
习题与答案
题目 1A Road Map
The ________ approach to exchange rates emphasizes the role of portfolio repositioning by international financial investors.
- A) elasticity
- B) asset market
- C) monetary
- D) balance-of-payments
正确答案：B | asset market
难度：1 Easy Bloom's：Remember
题目 2A Road Map
The asset market approach to exchange rate determination seeks to predict
- A) the forward exchange rate premiums.
- B) the long-run trends in exchange rates.
- C) the possibility of retaining a pegged exchange rate by the government.
- D) the short-term pressures on exchange rates.
正确答案：D | the short-term pressures on exchange rates.
难度：1 Easy Bloom's：Remember
题目 3Exchange Rates in the Short Run
The exchange rate value of a foreign currency is ________ in the short run by a rise in its expected future spot exchange rate value.
- A) raised
- B) lowered
- C) made volatile
- D) not affected
正确答案：A | raised
难度：1 Easy Bloom's：Remember
题目 4Exchange Rates in the Short Run
A decrease in the foreign interest rate relative to the domestic interest rate ________ the exchange rate value of a foreign currency in the short run.
- A) raises
- B) lowers
- C) does not affect
- D) causes fluctuations in
正确答案：B | lowers
难度：1 Easy Bloom's：Remember
题目 5Exchange Rates in the Short Run
Other things equal, a broad shift to expecting depreciation of the euro will lead to
- A) an inflow of capital to Europe.
- B) an increase in official exchange market intervention by the euro area monetary authorities.
- C) a lowering of exports of European goods and services.
- D) a decrease in the demand for euro-denominated financial assets.
正确答案：D | a decrease in the demand for euro-denominated financial assets.
难度：1 Easy Bloom's：Remember
题目 6Exchange Rates in the Short Run
If the domestic interest rate decreases, with the foreign interest rate and the expected future spot rate remaining unchanged, the value of the domestic currency vis-à-vis the foreign currency is expected to
- A) increase.
- B) decrease.
- C) remain unchanged.
- D) converge to its purchasing power parity (PPP) value.
正确答案：B | decrease.
难度：2 Medium Bloom's：Understand
题目 7Exchange Rates in the Short Run
If the expected future spot exchange rate value of the foreign currency decreases, with the interest rate differential unchanged, the current spot exchange-rate value of the domestic currency
- A) increases.
- B) decreases.
- C) remains unchanged.
- D) overshoots.
正确答案：A | increases.
难度：2 Medium Bloom's：Understand
题目 8Exchange Rates in the Short Run
Which of the following statements is true?
- A) If the domestic interest rate rises, there will be international financial repositioning toward domestic-currency assets, thereby causing the domestic currency to appreciate.
- B) If the expected future spot exchange rate value of the foreign currency decreases, there will be international financial repositioning toward foreign-currency assets, thereby causing the domestic currency to depreciate.
- C) If foreign interest rates increase, the domestic interest rate remaining unchanged, there will be international financial repositioning toward domestic-currency assets and the domestic currency will appreciate.
- D) If the expected future spot dollar per euro exchange rate increases, there will be international financial repositioning toward the dollar-denominated assets thereby causing the euro to depreciate.
正确答案：A | If the domestic interest rate rises, there will be international financial repositioning toward domestic-currency assets, thereby causing the domestic currency to appreciate.
难度：2 Medium Bloom's：Understand
题目 9Exchange Rates in the Short Run
Everything else remaining unchanged, an increase in interest rates in the United States is most likely to result in
- A) depreciation of the dollar.
- B) outflows of capital from the United States.
- C) capital inflows into the United States.
- D) a decrease in the demand for dollar-denominated financial assets.
正确答案：C | capital inflows into the United States.
难度：1 Easy Bloom's：Remember
题目 10Exchange Rates in the Short Run
Which of the following is NOT linked together by uncovered interest parity?
- A) The domestic interest rate
- B) The foreign interest rate
- C) The current spot exchange rate
- D) The current forward exchange rate
正确答案：D | The current forward exchange rate
难度：1 Easy Bloom's：Remember
题目 11Exchange Rates in the Short Run
If investors begin to expect a decrease in the value of the Thai baht vis-à-vis other currencies, their actions will cause
- A) a decrease in Thai interest rates.
- B) the actual depreciation to occur much faster.
- C) the Thai baht to appreciate immediately.
- D) a large inflow of foreign capital into Thailand.
正确答案：B | the actual depreciation to occur much faster.
难度：2 Medium Bloom's：Understand
题目 12Exchange Rates in the Short Run
The ________ effect suggests that speculations can sometimes be destabilizing as the actions of international investors move the exchange rate away from the long-run equilibrium value consistent with fundamental economic influences.
- A) bandwagon
- B) overshooting
- C) exchange rate
- D) arbitrage
正确答案：A | bandwagon
难度：1 Easy Bloom's：Remember
Manual Preview
教师手册摘录
What Determines Exchange Rates?
Since the general shift to floating exchange rates in the early 1970s, exchange rates between the U.S. dollar and other major currencies have been variable or volatile. The charts at the beginning of the chapter suggest three types of variability. First, there are long-term trends in which some currencies tend to appreciate against the dollar, and others tend to depreciate. Second, there are medium-term trends which are sometimes counter to the longer trends. Third, there is substantial variability during the short run. The chapter presents what we know about exchange movements during these time periods of different lengths.
The chapter first examines short-run movements in exchange rates. It presents the version of the asset market approach to exchange rates that focuses on debt securities and the uncovered interest parity relationship developed in Chapter 18, presuming that this relationship holds approximately if not exactly. The basic discussion examines the pressure on the current spot exchange rate if one of the other three rates (the domestic interest rate, the foreign interest rate, and the expected future spot exchange rate) changes, with the other two held constant. If the domestic interest rate increases, then the foreign currency depreciates (the home currency appreciates). If the foreign interest rate increases, then the foreign currency appreciates. (The text notes that what really matters is the change in the interest differential.)
If the expected future spot exchange rate value of the foreign currency increases, then the current spot exchange rate value of the foreign currency increases. Many different things can influence the expected future spot exchange rate. First, if expectations simply extrapolate recent trends, then a bandwagon is possible. Speculation then may be based on destabilizing expectations—expectations formed without regard to the economic fundamentals—and (speculative) bubbles can occur. Second, if expectations are based on a belief that exchange rates eventually follow PPP, then they lead to stabilizing speculation—speculation that tends to move the exchange rate toward a value consistent with the economic fundamentals of national price levels. Third, expectations are affected by various kinds of news about economic and political circumstances.
Slide Outline
课件线索
- Introduction
- Exchange Rates in the Short Run
- Asset Market Approach to Exchange Rates
- Exchange Rates in the Long Run
- The Law of One Price
- Absolute Purchasing Power Parity (Absolute PPP)
- Relative Purchasing Power Parity (Relative PPP)
- Monetary Approach to Exchange Rates
- The Monetary Approach
- Exchange-Rate Overshooting
- Overview of Key Elements, Exchange-Rate Overshooting
- Overview of Key Elements, Exchange-Rate Overshooting - Long Description
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