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Chapter 24

Floating Exchange Rates and Internal Balance

Floating Exchange Rates and Internal Balance This chapter presents the analysis of the macroeconomy of a country that has a floating exchange rate. If government officials allow the exchange rate to float cleanly, then the exchange rate changes to achieve external balance. With floating exchange rates monetary policy exerts strong influence on domestic product and income. A change in monetary policy results in a change in the country's interest rates.

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Slide16
知识点7
案例4
习题60

Knowledge Points

知识点

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Monetary Policy with Flexible Exchange Rates

With floating exchange rates monetary policy exerts strong influence on domestic product and income. A change in monetary policy results in a change in the country's interest rates. Both the current account and the financial account tend to change in the same direction. To keep the overall payments in balance, the exchange rate must change.

  • Shocks to the economy alter both the international performance of the country’s economy and its domestic performance.
  • With floating exchange rates, a change in the exchange rate takes care of achieving external balance following a shock.
  • If the country’s overall payments tend to go into deficit, then the country’s currency depreciates, reversing the tendency toward deficit.
manual

Fiscal Policy with Flexible Exchange Rates

With floating exchange rates the effect of a change in fiscal policy depends on how responsive international capital flows are to changes in interest rates. If capital flows are sufficiently responsive, then the exchange rate changes in the direction that counters the thrust of the fiscal policy change—an effect sometimes called international crowding out.

  • Long description on slide 6
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International Macroeconomic Policy Coordination

Changes in government policies adopted by one country can have spillover effects on other countries. International macroeconomic policy coordination involves some degree of joint determination of several countries' macroeconomic policies to improve joint performance. Efforts at policy coordination in the late 1970s and 1980s include the agreement at the Bonn Summit of 1978, the Plaza Agreement of 1985, and the Louvre Accord of 1987, but major efforts at coordination are infrequent.

  • The policies adopted by one country have effects on other countries.
  • A policy change that benefits the country making it may harm other countries.
  • A country may fail to make a policy change that benefits other countries.
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Shocks to the Economy

Domestic monetary shocks have strong effects on domestic product, with the exchange rate change reinforcing the thrust of the shock. The effects of domestic spending shocks depend on how responsive international capital flows are to changes in interest rates. International capital flow shocks affect the domestic economy by changing the exchange rate and the country's international price competitiveness.

  • Internal Shocks
  • Domestic monetary shocks
  • Domestic spending shocks
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Internal Imbalance and Policy Responses

While a cleanly floating exchange rate ensures external balance, it does not ensure internal balance, and changes in the floating exchange rate to achieve external balance can exacerbate an internal imbalance. Government monetary or fiscal policies may be used to address internal imbalances.

  • Shocks to the economy alter both the international performance of the country’s economy and its domestic performance.
  • With floating exchange rates, a change in the exchange rate takes care of achieving external balance following a shock.
  • If the country’s overall payments tend to go into deficit, then the country’s currency depreciates, reversing the tendency toward deficit.
manual

International Microeconomic Policy Coordination

Changes in government policies adopted by one country can have spillover effects on other countries. International macroeconomic policy coordination involves some degree of joint determination of several countries' macroeconomic policies to improve joint performance. Efforts at policy coordination in the late 1970s and 1980s include the agreement at the Bonn Summit of 1978, the Plaza Agreement of 1985, and the Louvre Accord of 1987, but major efforts at coordination are infrequent.

  • The policies adopted by one country have effects on other countries.
  • A policy change that benefits the country making it may harm other countries.
  • A country may fail to make a policy change that benefits other countries.
manual

Floating Exchange Rates

Floating Exchange Rates and Internal Balance

  • Floating Exchange Rates and Internal Balance

Cases

案例与情境

This is what did happen. On March 18, the monetary authorities ...

This is what did happen. On March 18, the monetary authorities of Japan, the United States, Britain, Canada, and the euro area conducted a coordinated intervention totaling about $10.4 billion. Within an hour of the announcement of the impending intervention, the yen depreciated 3 to 4 percent and then stayed at the lower exchange rate values for the next week.

查看原始摘录

This is what did happen. On March 18, the monetary authorities of Japan, the United States, Britain, Canada, and the euro area conducted a coordinated intervention totaling about $10.4 billion. Within an hour of the announcement of the impending intervention, the yen depreciated 3 to 4 percent and then stayed at the lower exchange rate values for the next week. Suggested answers to end of chapter questions and problems 1.Agree. The change in the exchange rate that occurs when there is a change in monetary policy is the basis for the enhanced effectiveness of monetary policy under floating exchange rates. For instance, when monetary policy shifts to be more expansionary, the decrease in the country’s interest rate results in a depreciation of the country’s currency. This is essentially overshooting (although overshooting also emphasizes that this depreciation is very large). It is oversho

The box on “Why Are U.S. Trade Deficits So Big?” provides ...

The box on “Why Are U.S. Trade Deficits So Big?” provides an application of the floating-rate analysis to the macroeconomic experience of the United States since 1980. The box shows that changes in the real exchange rate and changes in the trade deficit (with the expected lag) have been closely correlated. Digging behind this relationship to examine saving and real investment, it appears that the large U.S.

查看原始摘录

The box on “Why Are U.S. Trade Deficits So Big?” provides an application of the floating-rate analysis to the macroeconomic experience of the United States since 1980. The box shows that changes in the real exchange rate and changes in the trade deficit (with the expected lag) have been closely correlated. Digging behind this relationship to examine saving and real investment, it appears that the large U.S. trade deficits were the result of the government budget deficit in the 1980s, and were the result of a real investment boom in the late 1990s, with the fiscal deficit again becoming important in the early 2000s.

c.If the dollar depreciates, then the United States gains international ...

c.If the dollar depreciates, then the United States gains international price competitiveness. U.S. exports increase and imports decrease. The current account improves further. The increase in exports and shift of domestic spending from imports to domestic products add some aggregate demand, so domestic product and income rebound somewhat (or do not decline by as much).

查看原始摘录

c.If the dollar depreciates, then the United States gains international price competitiveness. U.S. exports increase and imports decrease. The current account improves further. The increase in exports and shift of domestic spending from imports to domestic products add some aggregate demand, so domestic product and income rebound somewhat (or do not decline by as much).

Changes in government policies adopted by one country can have spillover ...

Changes in government policies adopted by one country can have spillover effects on other countries. International macroeconomic policy coordination involves some degree of joint determination of several countries' macroeconomic policies to improve joint performance. Efforts at policy coordination in the late 1970s and 1980s include the agreement at the Bonn Summit of 1978, the Plaza Agreement of 1985, and the Louvre Accord of 1987, but major efforts at coordination are infrequent.

查看原始摘录

Changes in government policies adopted by one country can have spillover effects on other countries. International macroeconomic policy coordination involves some degree of joint determination of several countries' macroeconomic policies to improve joint performance. Efforts at policy coordination in the late 1970s and 1980s include the agreement at the Bonn Summit of 1978, the Plaza Agreement of 1985, and the Louvre Accord of 1987, but major efforts at coordination are infrequent. Countries disagree about goals and about how the macroeconomy works, and the benefits of coordination often are probably rather small.

Exercises

习题与答案

题目 1Monetary Policy with Flexible Exchange Rates

Under a floating exchange-rate regime

  • A) only fiscal policy should be used to reconcile the goals of internal and external balance.
  • B) the changes in the exchange rate can take care of external balance, leaving macroeconomic policy to take care of internal balance.
  • C) deficits and surpluses in the official settlements balance will be the primary concern of policy makers.
  • D) monetary policy must be used to manage the exchange rate.

正确答案：B | the changes in the exchange rate can take care of external balance, leaving macroeconomic policy to take care of internal balance.

难度：2 Medium Bloom's：Understand

题目 2Monetary Policy with Flexible Exchange Rates

Changes in floating exchange rates move a country's economy to:

  • A) its potential real GDP.
  • B) a low value for its inflation rate.
  • C) a zero value for its official settlements balance.
  • D) all of the above.

正确答案：C | a zero value for its official settlements balance.

难度：1 Easy Bloom's：Remember

题目 3Monetary Policy with Flexible Exchange Rates

Other fundamental things equal, an increase in the exchange-rate value of the domestic currency will make domestic goods

  • A) more in demand internationally.
  • B) less competitive in the international markets.
  • C) more expensive in the domestic market.
  • D) more expensive to produce.

正确答案：B | less competitive in the international markets.

难度：2 Medium Bloom's：Understand

题目 4Monetary Policy with Flexible Exchange Rates

Other fundamental things being equal, a decrease in the exchange rate value of the domestic currency will make domestic goods

  • A) more in demand internationally.
  • B) less competitive in the international markets.
  • C) less expensive in the domestic market.
  • D) less expensive to produce.

正确答案：A | more in demand internationally.

难度：2 Medium Bloom's：Understand

题目 5Monetary Policy with Flexible Exchange Rates

Other fundamental things being equal, an increase in the exchange-rate value of the domestic currency will cause the current account to

  • A) become more unbalanced.
  • B) become smaller than the (nonofficial) financial account.
  • C) move toward a long-run equilibrium.
  • D) move toward a deficit.

正确答案：D | move toward a deficit.

难度：2 Medium Bloom's：Understand

题目 6Monetary Policy with Flexible Exchange Rates

Other fundamental things being equal, a decrease in the exchange rate value of domestic currency will cause the current account to

  • A) overshoot its long-run value.
  • B) equal the official settlements balance.
  • C) move toward a surplus.
  • D) move toward a long-run deficit.

正确答案：C | move toward a surplus.

难度：2 Medium Bloom's：Understand

题目 7Monetary Policy with Flexible Exchange Rates

An expansion of the money supply by the country's central bank

  • A) decreases the willingness of banks to lend money.
  • B) reduces the price level.
  • C) increases the level of international capital inflows.
  • D) causes domestic interest rates to fall.

正确答案：D | causes domestic interest rates to fall.

难度：1 Easy Bloom's：Remember

题目 8Monetary Policy with Flexible Exchange Rates

Under a floating exchange-rate regime, an expansion in the money supply will

  • A) induce financial capital to leave the country.
  • B) attract speculative capital into the country.
  • C) have no effect on financial account balance.
  • D) cause a surplus in the official settlement balance.

正确答案：A | induce financial capital to leave the country.

难度：1 Easy Bloom's：Remember

题目 9Monetary Policy with Flexible Exchange Rates

Under a floating exchange-rate regime, following an expansion in the country's money supply, the country's monetary authority

  • A) must buy foreign currency in the foreign exchange market.
  • B) must buy domestic currency in the foreign exchange market.
  • C) may not intervene in the foreign exchange market.
  • D) will be forced to reverse the monetary expansion.

正确答案：C | may not intervene in the foreign exchange market.

难度：2 Medium Bloom's：Understand

题目 10Monetary Policy with Flexible Exchange Rates

Under a floating exchange-rate regime, the domestic currency will normally depreciate if the money supply

  • A) contracts.
  • B) expands.
  • C) does not change with the change in the exchange rates.
  • D) is managed to keep the country's inflation rate steady.

正确答案：B | expands.

难度：1 Easy Bloom's：Remember

题目 11Monetary Policy with Flexible Exchange Rates

With perfect capital mobility, uncovered interest parity always holds because

  • A) almost unlimited flows of capital can occur if there is any deviation from the parity.
  • B) lower domestic interest rates trigger hedging to avoid exchange-rate risks.
  • C) capital flows out at a much faster rate than it flows in if the interest rate changes.
  • D) the no-arbitrage condition cannot be satisfied without using forward contracts.

正确答案：A | almost unlimited flows of capital can occur if there is any deviation from the parity.

难度：2 Medium Bloom's：Understand

题目 12Fiscal Policy with Flexible Exchange Rates

Under a floating exchange-rate regime with a low degree of capital mobility, if the domestic government uses an expansionary fiscal policy

  • A) the domestic interest rate increases.
  • B) foreign capital outflows decrease domestic product.
  • C) the financial account balance deteriorates.
  • D) the official settlements balance tends to go into surplus.

正确答案：A | the domestic interest rate increases.

难度：2 Medium Bloom's：Understand

Manual Preview

教师手册摘录

Floating Exchange Rates and Internal Balance

This chapter presents the analysis of the macroeconomy of a country that has a floating exchange rate. If government officials allow the exchange rate to float cleanly, then the exchange rate changes to achieve external balance.

With floating exchange rates monetary policy exerts strong influence on domestic product and income. A change in monetary policy results in a change in the country's interest rates. Both the current account and the financial account tend to change in the same direction. To keep the overall payments in balance, the exchange rate must change. The exchange rate change results in a change in international price competitiveness, assuming that it is larger or faster than any change in the country's price level—overshooting. The change in price competitiveness results in a change in net exports that reinforces the thrust of the change in monetary policy. We can picture the change in monetary policy as a shift in the LM curve, and then a shift in the IS and FE curves to a new triple intersection as the exchange rate and price competitiveness change.

With floating exchange rates the effect of a change in fiscal policy depends on how responsive international capital flows are to changes in interest rates. If capital flows are sufficiently responsive, then the exchange rate changes in the direction that counters the thrust of the fiscal policy change—an effect sometimes called international crowding out. If capital flows are not that responsive (or, as we enter into the longer time period when the capital flows have slowed), the change in the current account dominates, so that the exchange rate changes in the direction that reinforces the thrust of the fiscal policy change. Both cases are shown as a shift in the IS curve, with the position of the intersection between the new IS curve and the LM curve being above or below the initial FE curve, depending on how flat or steep the FE curve is. The exchange rate change then shifts both the IS and FE curves toward a new triple intersection.

Slide Outline

课件线索

  • Floating Exchange Rates
  • Effects of Expanding the Money Supply with Floating Exchange Rates
  • Effects of Expansionary Fiscal Policy with Floating Exchange Rates
  • Effects of Expansionary Fiscal Policy with Floating Exchange Rates - Long Description
  • Expansionary Fiscal Policy with Floating Exchange Rates
  • Expansionary Fiscal Policy with Floating Exchange Rates - Long Description
  • Shocks to the Economy
  • Domestic Monetary Shocks
  • Domestic Spending Shocks
  • International Capital-Flow Shocks
  • International Trade Shocks
  • Internal Imbalance and Policy Responses

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