1 Ch 5 The Open Economy Mankiw: Macro Ch 5 and Appendix Mankiw: Econ Ch31, Ch32.

1

Ch 5The Open Economy

Mankiw: Macro Ch 5 and AppendixMankiw: Econ Ch31, Ch32

2

Outline accounting identities for the open economy the small open economy model

what makes it “small” how the trade balance and exchange rate are

determined how policies affect trade balance & exchange rate

3

Open and Closed Economies A closed economy 封閉的經濟體系：

one that does not interact with other economies:

no exports, no imports, no capital flows. An open economy 開放的經濟體系： one that interacts with other economies around the world.

1. buys/ sells goods & services in world product markets: International flow of goods.

2. buys/ sells capital assets in world financial markets: International flow of financial resources.

4

1. The International Flow of Goods

Exports (EX ，出口 ) ： goods & services produced domestically and sold abroad.

Imports (IM ，進口 ) ： goods and services produced abroad and sold domestically.

Net exports (NX ，淨出口 ) or trade balance (TB ，貿易淨額 ) ：NX=EX-IM

5

The Flow of Goods

Net exports or Trade balance ：(1) NX=0 ， EX=IM ： balanced trade 貿易平衡(2) NX > 0 ， EX > IM ： trade surplus 貿易盈餘

( 出超 )

(3) NX < 0 ， EX < IM ： trade deficit 貿易赤字（入

超）

6

Trade-GDP ratio, selected countries, 2004(Imports + Exports) as a percentage of GDP (%)

Luxembourg 275.5

Ireland 150.9

Czech Republic 143.0

Hungary 134.5

Austria 97.1

Switzerland 85.1

Sweden 83.8

Korea 83.7

Poland 80.0

Canada 73.1

Germany 71.1

Turkey 63.6

Mexico 61.2

Spain 55.6

United Kingdom 53.8

France 51.7

Italy 50.0

Australia 39.6

United States 25.4

Japan 24.4

7

Taiwan data: Trade-GDP ratio

Taiwan (%) EX/Y IM/Y (EX ＋ IM)/Y

歷年平均 38.16 36.51 74.67

1951-1960 9.42 15.65 25.07

1961-1970 20.81 22.91 43.72

1971-1980 45.60 43.98 89.59

1981-1990 52.17 42.26 94.42

1991-2000 46.50 44.30 90.79

2001-2007 61.43 55.74 117.17

8

Taiwan data: NX=EX-IM

Fig GDP %出口與進口佔比例（）

0

10

20

30

40

50

60

70

80

1951 1954 1957 1960 1963 1966 1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005

年度

%

出口比例

進口比例

9

U.S. net exports, 1950-2006

U.S. Net Exports, 1950-2006

-800

-600

-400

-200

0

200

1950 1960 1970 1980 1990 2000

billi

ons

of d

olla

rs

-8%

-6%

-4%

-2%

0%

2%

perc

ent

of G

DP

NX ($ billions) NX (% of GDP)

10

GDP: expenditure approach

EX = exports

= foreign spending on domestic goods

IM = imports = C f + I f + G f = spending on foreign goods

NX = net exports (trade balance)

= EX – IM

d fC C C d fI I I d fG G G

superscripts:d = spending on

domestic goodsf = spending on

foreign goods

11

GDP: expenditure approach

d d dY C I G EX

( ) ( ) ( )ff fC C I I G G EX

( )ff fC I G EX C I G

C I G EX IM

C I G NX

12

Accounting identities

Y = C + I + G + NX

or, NX = Y – (C + I + G )

net exports

domestic spending

output

13

Factors that Affect NX

(1) Tastes of consumers for domestic & foreign goods.

(2) The incomes of consumers at home and abroad.

(3) The prices of goods at home (P) and abroad (PF).

(4) The exchange rates ( 匯率， e) at which people can use domestic currency to buy foreign currencies.

(5) The costs of transporting goods from country to country.

(6) The policies of the government toward international trade.

14

2. The Flow of Financial Resources Net capital outflow (NCO) ，淨資本流出：

purchase of foreign assets by domestic residents minus purchase of domestic assets by foreigners.

A Taiwanese buys stock in the US corporation Capital outflow （ $ 流出） a US citizen buys Taiwan stock. Capital inflow （ $ 流入）Net capital outflow =capital outflow –capital inflow（ $ 淨流出）

15

Factors that Influence NCO

(1) real interest rates (rF) being paid on foreign assets.

real interest rates ( r ) being paid on domestic assets. the differences ( r- rF ) matters

As r↑ relative to rF

less capital outflow and more capital inflowNCO↓

(2) The perceived economic and political risks of holding assets abroad.

(3) The government policies that affect foreign ownership of domestic assets.

16

S, I and NX

Expenditure approach of GDP:

Y = C + I + G + NX

Income approach of GDP:

S= Y-C-G

→ S =Y-C-G = I + NX (Identity)

17

S, I and NCO

Saving S = wealth △(wealth: deposits/bonds/stocks/houses)

= domestic assets + foreign assets△ △ = domestic investment +net capital outflow

= I + NCO An economy’s saving can be used to either

finance investment at home or to buy assets abroad.

18

The Equality of NX and NCO National saving (S): S = I + NX or S= I + NCO NX = NCO When S > I, NX=NCO>0, country is a net lender

When S < I, NX=NCO<0, country is a net borrower

補充：國際收支帳＝經常帳＋資本帳（小）＋金融帳經常帳：包含 NX金融帳：包含這裡的 NCO 簡化分析

19

Taiwan data: S-I=NX

Fig 31.2a 國民儲蓄與投資比例

0

5

10

15

20

25

30

35

40

45

1951 1954 1957 1960 1963 1966 1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005

年度

%

國民儲蓄比例

投資比例

20

Taiwan data: NCO=NX

Fig 31.2b NCO (%)比例

-10

-5

0

5

10

15

20

25

1951 1954 1957 1960 1963 1966 1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005

年度

% NCO比例

21

The Prices for International Transactions: Real and Nominal Exchange Rates

International transactions are influenced by international prices.

The nominal exchange rate 名目匯率：the rate at which a person can trade the currency of one country for the currency of another.

貨幣的價格（以另一種貨幣表示）

22

Nominal Exchange Rates The nominal exchange rate （ e ）

is expressed in two ways:(1) in units of foreign currency (FE) per one Taiwan doll

ar.(2) in units of Taiwan dollars per one unit of the foreign

currency. Assume the exchange rate between the NT$ and U.S. doll

ar is NT$30.3 to one U.S.dollar.(1) NT$1 trades for 1/30.3 (= 0.033) of a U.S. dollar.(2) One U.S. dollar trades for NT$30.3 採用

23

Nominal Exchange Rates Appreciation 升值 :

an increase in the value of a currency as measured by the amount of foreign currency it can buy.

Depreciation 貶值 : a decrease

eg,

(1)US$1=NT$33 NT$30 （美金貶值） NT$1=US$(1/33) US$(1/30) ：台幣升值(2) US$1=NT$33 NT$35 ：台幣貶值 ( 美金升值 )

24

Taiwan data: 台幣對美金匯率

1960-2007台幣對美金匯率（年資料）

0

5

10

15

20

25

30

35

40

45

年度

美金

匯率

美金匯率

25

匯率換算2008/10/29

US$1= 日圓 $97

US$1=NT$33.3

日圓 $97=US$1=NT$33.3

日圓 $1=NT$0.34

(NT$1= 日圓 $2.91)

26

Real Exchange Rates

The real exchange rate compares the prices of domestic goods and foreign goods in the domestic economy.

:

:

X

Y

F

PY

X P

X Q domestic goods

Y Q foreign goods

The real exchange rate 實質匯率 (ε):the rate at which a person can trade the goods and services of one country for the goods and services of another.

27

Real Exchange Rates The real exchange rate depends on

the nominal exchange rate and the prices of goods in the two countries measured in local currencies.

Real exchange rate

foreign goods

domestic goods

Domestic price

Foreign price Nominal exchange rate

F

F

Q

Q

P

eP

28

Real Exchange Rates If a case of Taiwan beer is NT$30,

a case of American beer is US$0.5,

and e =30,

A case of Taiwan beer is twice as expensive as American beer.

Or the real exchange rate is 2 cases of American beer per case of Taiwan beer.

302

30*0.5

2( ) or 2

F

F

F F

Q P

Q eP

P eP Q Q

29

Real Exchange Rates The real exchange rate is a key determinant of

how much a country exports and imports.

(real exchange rate = terms of trade 貿易條件 ) A depreciation (fall) in Taiwan real exchange rate: 貶值

ε↓ =(P/ePF) ↓ ， due to P ↓or PF↑ or e↑

Taiwan goods have become cheaper relative to foreign goods.

IM ↓ and EX ↑ NX ↑

30

U.S. net exports and the real exchange rate, 1973-2006

-7%

-6%

-5%

-4%

-3%

-2%

-1%

0%

1%

2%

3%

1973 1977 1981 1985 1989 1993 1997 2001 2005

NX

(%

of

GD

P)

0

20

40

60

80

100

120

140

Ind

ex (

Mar

ch 1

973

= 1

00)

Trade-weighted real exchange rate index

Net exports(left scale)

31

An Open Macro Model

Ch5 open macro model:

3 markets and 2 prices to assure general equilibrium:

(1) LF market: S(r) = I(r)+NCO(r) r*

(2) Market for Foreign-Currency Exchange (FE):

NCO(r)=NX(ε) ε*

(3) Goods market: 本期 K 外生， L 給定或固定， Y(LR) is determined by the supply side. Y=AF(K, L)

而 r* C, S, I, andε*NX: 即決定 Yd 成分＊＊ no labor market, no money market, if have, PPP:MP

＊ LF and FE 市場均衡，隱含商品市場也均衡，故著重前兩個市場的分析。

32

An Open Macro Model Key macro variables:

national saving: S investment: I net exports ： NX net capital outflow ： NCO ( 課本 CF) real interest rate: r nominal exchange rates ： e

real exchange rates ： ε ≡ (P/ePF).

33

Large Open Economies (Appendix)

Basic Assumptions Takes GDP (Y and YF) as given (exogenous)

排除 Y 對 IM 的影響，排除 YF 對 EX 的影響

Takes price level (P and PF) as given:Nominal and Real exchange rate: 1-1 對應eg, 台幣升值 e↓ < ＝ > ε≡ (P/ePF) ↑

Assume perfect capital mobility:no restrictions on international capital flows

And assume domestic & foreign bonds are perfect substitutes(same risk, maturity, etc.)

_ r is determined in the LF market.

34

Markets for Loanable Funds (LF)

S = I + NCO Supply of LF ： SLF ＝ S

Demand for LF ： DLF ＝ I+NCO

domestic investment and net capital outflows (net foreign investment).

The price in LF market is the real interest rate,

r=R-π.

35

LF Market

SLF =S ： (+)vely-slpoed ，Assume SE >IE, so r ↑→ S ↑

DLF=I+NCO ： (-) vely-slpoed ，As r ↑, I↓, NCO↓(r↑ relative rF )

Market equilibrium:

The interest rate adjusts to bring supply and demand for loanable funds into balance.

36

Fig 5-15How Net Capital Outflow Depends on the Interest Rate

Copyright©2003 Southwestern/Thomson Learning

0 Net CapitalOutflow

Net capital outflowis negative.

Net capital outflowis positive.

RealInterest

Rate

NCO

37

Figure 5-17 The Market for Loanable Funds


Quantity ofLoanable Funds

RealInterest

Rate

SLF=S

DLF=I+NCO

LF*

r*

38

Market for Foreign-Currency Exchange (FE)

Assume FE =U.S. dollars For an economy as a whole,

NCO = NX

equilibrium condition of FE market

The price in FE market is the real exchange rate (P/eP

F).

課本圖形為對美金（本國貨幣）供需，在此採用該圖形則為本國貨幣「台幣」的供需

39

FE Market DFE= NX ： (-) vely-slpoed ，

As ε =(P/ePF) ↓, EX↑, IM↓, NX↑NX↑: demand for NT$↑ in terms of US$

( 出口賺美金，將美金兌換為台幣，為台幣需求 DFE= DNT)

SFE =NCO ： vertical ，NCO ：由 r 與 rF 差異決定，

unrelated to the real exchange rate.

( 為購買美國資產，將台幣兌換為美金，為台幣供給 SFE = SNT )

Market Equilibrium:The real exchange rate adjusts to balance supply and demand for dollars.

40

Figure 5-18 The Market for Foreign-Currency Exchange


Quantity of NT Dollars In terms of US dollar

RealExchange

RateSFE=SNT ＝ NCO

DFE=DNT ＝ NX

Q*NT

Equilibrium ε *=(P/ePF)*

41

FE Market

At ε*=(P/ePF)*, 同時決定 e* ( given P and PF)

DNT from net exports exactly balances

SNT to be exchanged into foreign currency to buy assets abroad.

Alternative( 補充 ) ：也可以以外匯（美金）供需做圖，最終推論相同。美金供需決定美金價格（匯率）一體兩面：對台幣需求＝對美金供給對台幣供給＝對美金需求

Consider NX↑ : D-S analysis ε*↑ and e*↓

42

Fig Alternative representation ( 僅供參考，課堂不採用 ): The Market for Foreign-Currency Exchange


Quantity of FE (US dollars)

Nominal Exchange rate

(e)

Equilibriumquantity

Equilibrium e*

Supply of US dollars(NX)

Demand for US dollars(NCO)

43

Equilibrium in the Large Open Economy

Fig 5-19: Equilibrium in the Open Economy NCO links LF market and FE market. ( 圖 b) r in LF market ( 圖 a) and ε in FE market ( 圖 c)

adjust simultaneously to achieve equilibrium

in these two markets. As they do, they determine the macro variables of S, I, NX, an

d NCO.

補充： r, ε(e), S, I, NX, NCO ： endogenous 內生變數

44

Figure 5-19 The Real Equilibrium in an Open Economy


(a) The Market for Loanable Funds (b) Net Capital Outflow

Net capitaloutflow, NCO

RealInterest

Rate

RealInterest

Rate

(c) The Market for Foreign-Currency Exchange

Quantity ofNT Dollars


Net CapitalOutflow

RealExchange

Rate

SNT

SLF=S

DLF=I+NCO

DNT

r r

ε1

45

Comparative Statics The magnitude and variation in open macro variables

depend on:

1. Government budget deficits

2. Trade policies

3. Political and economic stability

46

1. Government Budget Deficits: Sg < 0 S↓

( 圖 a) In an open economy, government budget deficits (Sg < 0) reduce the supply of LF market ：S↓ SLF ↓ r*↑ I↓ and NCO↓ ( 圖 b) Movement along with NCO curve

( 圖 c) Effect on FE MarketNCO↓ SFE ↓: shifts to the left

real exchange rate↑ （課本符號 ε↑ ）：升值 and also e*↓ ( 升值， P, PF as given )ε↑ NX↓eg, Twin deficits (1980s US: Sg<0 and NX<0)

47

Fig 5-20 The Effects of Government Budget Deficit



RealInterest

Rate

RealInterest

Rate


Quantity ofNT Dollars


Net CapitalOutflow

RealExchange

Rate

D

D

r2

NCO

SS

S S

r2

B

ε1

r rA

1. A budget deficit reducesthe supply of loanable funds . . .

2. . . . which Increases r

4. The decrease

In NCO reducesthe supply of dollarsto be exchangedinto foreigncurrency . . .

5. . . . which causes thereal exchange rate toappreciate.

3. . . . which inturn reducesNCO

ε2

48

2. Trade Policy 貿易政策 A trade policy is a government policy that directly inf

luences the quantity of goods and services that a country imports or exports.

Tariff 關稅 : A tax on an imported good. Import quota 進口配額 : A limit on the quantity

of a good produced abroad and sold domestically.

49

Trade Policy: Effect of an Import Quota

Effect of an Import Quota

( 圖 a, b) S , I, and NCO: unaffected r* ： the same

( 圖 c) Initial IM↓ NX↑= DE↑: shifts to the right

the real exchange rate to appreciate.

NX↓( movement along DE2) = initial NCO

This offsets the initial increase in net exports due to import quota.

Trade policies do not affect the trade balance.

Trade policies have a greater effect on microeconomic than on macroeconomic markets.

50

Fig 5-22 The Effects of an Import Quota



RealInterest

Rate

RealInterest

Rate


Quantity ofDollars


Net CapitalOutflow

RealExchange

Rate

r r

Supply

S

DNCO

D

D

3. NXhowever, remainthe same.

2. . . . and causes thereal exchange rate to appreciate.

ε1

ε2

1. An importquota increasesD fo NTdollars . . .

51

3. Political Instability and Capital Flight資金外逃金融危機 When an economy faces political instability,

capital flight may happen:

a large/ sudden reduction in D for the country’s assets .

eg, 1994 Capital Flight in Mexico

1997 Capital Flight in East Asia

Capital is fleeing ： NCO↑

( 圖 b, a) NCO↑ DLF↑ r*↑

( 圖 b ,c) NCO↑ SFE↑ ε* ↓ e*↑

(the domestic currency depreciates. 貨幣大幅貶值 )

52

Fig 5-23b The Effects of Capital Flight ( 課本 5-23 ： NCO 是左移的例子 )


(a) The Market for Loanable Funds in Mexico (b) Mexican Net Capital Outflow

RealInterest

Rate

RealInterest

Rate


Quantity ofPesos


Net CapitalOutflow

RealExchange

Rate

r1 r1

D1

D2

ε1

D

S S2

S

NCO2NCO1

1. An increase in NCO

3. . . . which increasesthe interestrate.

2. . . . increases the demandfor loanable funds . . .

4. At the sametime, the increasein NCO

increases thesupply of pesos . . .

5. . . . which causes thepeso todepreciate.

r2 r2

ε2

53

Samll Open Economy: additional assumption regarding capital flows Small economy cannot affect the world interest rate,

r is exogenous, r= r* (r*:the world real interest rate)

NCO= S(r*)- I(r*)

Only real exchange rate is determined in the FE market: ε*

課本 NX= S - I(r*) ，供需觀點， NCO 較正確 :Fig5-16(b): NCO is perfectly elastic at world r*.

課本圖： Assume S is not a function of r

S is vertical. NCO= S - I(r*)

* The main results are not affected

even if S is assumed to be positively-sloped.

54

A small open economy: LF marketr

S, I

I (r )

S

rc

r*

I 1

the exogenous world interest rate r* determines I

the exogenous world interest rate r* determines I

…and the difference between S and I determines NCO

…and the difference between S and I determines NCO

NCO1

55

FE market equilibrium:ε*

ε

NT$

NX(ε )

ε 1

NCO1

*)(S 1 rI

56

Comparative statics

1. Fiscal policy at home

2. Fiscal policy abroad

3. An increase in investment demand

4. Trade policy to restrict imports

57

1. Fig 5-3, 5-9: Expansionary Fiscal policy at home

r

S, I

I (r )

1S

I 1

An increase in G or decrease in T reduces saving.

Results:

An increase in G or decrease in T reduces saving.

Results:1*r

NCO1

2S

NCO2

0,0I SNCO

58

1. Expansionary Fiscal policy at home:ε*↑( 升值 ) and NX↓

ε

NT$

NX(ε )

1 ( *)S I r

ε 1

NCO 1NCO 2

2 ( *)S I r

ε 2

59

NX and the federal budget deficit (% of GDP), 1960-2006

-6%

-4%

-2%

0%

2%

4%

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

-4%

-2%

0%

2%

4%

6%

8%

Net exports

(left scale)

Budget deficit (right scale)

slide 59

60

2. Fig 5-4, 5-10:Fiscal expansion abroadr

S, I

I (r )

1SExpansionary fiscal policy abroad raises the world interest rate. 1

*rNCO1

NCO2

Results: Results: 0I

2*r

1( )*I r2( )*I r

0 INCO

61

2. Expansionary Fiscal policy abroad:ε* ↓( 貶值 ) and NX ↑

ε

NT$

NX(ε )

1 1( *)S I r

NCO 1

ε 1

21 ( )*S I r

ε 2

NCO 2

62

3. Fig 5-5, 5-11:An increase in investment demand

r

S, I

I (r )1

Results:

△I > 0,

△S = 0,

△NCO= -△I <0

Results:

△I > 0,

△S = 0,

△NCO= -△I <0

NCO2

NCO1

*r

I 1 I 2

S

I (r )2

63

3. Increase in investment demand: ε*↑( 升值 ) and NX↓

ε

NT$

NX(ε )

ε 1

1 1S I

NCO 1

21S I

NCO 2

ε 2

64

4. Fig 5-12:Trade policy to restrict imports

ε

NT$

NX (ε )1

S I

NCO1

ε 1

NX (ε )2

At any given value of ε, an import quota IM NX demand for

NT dollars shifts right.

At any given value of ε, an import quota IM NX demand for

NT dollars shifts right.

Trade policy doesn’t affect S or I , so capital flows and the supply of NT dollars remain fixed.

Trade policy doesn’t affect S or I , so capital flows and the supply of NT dollars remain fixed.

ε 2

Results:ε > 0, NX = 0,

IM < 0, EX < 0

Results:ε > 0, NX = 0,

IM < 0, EX < 0

65

NX

I

r

large open economy

small open economy

closed economy

A fiscal expansion in three models

falls, but not as much as in small open economy

fallsno

change

falls, but not as much as in closed economy

nochange

falls

rises, but not as much as in closed economy

nochange

rises

A fiscal expansion causes national saving to fall.The effects of this depend on openness & size:

66

no change

no change

no change

no change

129.4

-2.0

19.4

6.3

17.4

3.9

115.1

-0.3

19.9

1.1

19.6

2.2

closed economy

small open economy

actual change

ε

NX

I

r

S

G – T

1980s1970s

Data: decade averages; all except r and ε are expressed as a percent of GDP; ε is a trade-weighted index.

CASE STUDY: The Reagan deficits revisited

67

Determinants of the nominal exchange rate

Definition for the real exchange rate:

FPe

P

Solve for the nominal exchange rate:

FP

Pe

68


So e depends on the real exchange rate and the price levels at home and abroad…

FP

Pe

),*(: YrLP

MP

),*(: FFFF

FF YrL

P

MP

*)(*)(*)()(: rIrSrNCONX

69


in growth rates

)( FF

F

P

P

P

P

e

e

For a given value of ε, the growth rate of e equals the difference between domestic and foreign inflation rates.

The higher the domestic inflation rate, the greater the depreciation of domestic currency.

FP

Pe

70

Inflation differentials & nominal exchange rates

-5

0

5

10

15

20

25

30

35

-5 0 5 10 15 20 25 30Inflation differential

Percentage change in

nominal exchange

rate

_

U.K.

South Africa

Iceland

Mexico

South Korea

Canada

Singapore

Japan

71

LR Theory of Exchange -Rate Determination:Purchasing-Power Parity Theory （ PPP theory ） The simplest and most widely accepted theory explaining the

variation of currency exchange rates.

PPP theory 購買力平價說：a unit of any given currency should be able to buy the same quantity of goods in all countries

(same purchasing power).

LR equilibrium theory

72

Purchasing Power Parity (PPP) For one unit of goods: same price e

PF = P

Solve for e :

e = P/ PF PPP implies that the nominal exchange rate between

two countries equals the ratio of the countries’ price levels.

73

Logic of PPP: （隱含 ε=1）NT$1

= able to buy the same quantity of goods in all countries.

=(1/P) unit of goods in Taiwan

=(1/e)/PF unit of goods in foreign country

1/P= 1/ePF P/ePF =1

QQPeP

Pe

P

Q

Q

FF

F

F

or )(

1

74

Logic of PPP

PPP based on the law of one price.

（競爭）整合市場的單一價格 According to the law of one price, a good must sell for the

same price in all locations. If the law of one price were not true, unexploited profit opp

ortunities would exist.

arbitrage. 套利： the process of taking advantage of differences in prices in different markets.

eventually prices that differed in two markets would necessarily converge. 收斂

75

Implications of PPP According to PPP, P/ePF =1 Exchange rates move to ensure that in the LR. （ LR equilibrium exchange rate: e* ）

P/ePF =1 e* = P/PF

e* must reflect the different price levels in two countries.

Table 5-2: 2005 年 Big Mac 在美價格美金 3.06 元，在台灣為新台幣 75.4 元。即美金值 24.6 台幣。 ( 但實際匯率為 31.3)

P=NT$75.4, PF =US$3.06 e* = P/PF =NT$75.4/US$3.06= NT$24.6/US$

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Arbitrage 1: price adjustment

If real exchange rate = P/ePF <1

P < ePF

Arbitrage 1 ： P < ePF _ EX↑, IM↓ demand for domestic goods↑& demand for foreign goods↓

Possible that P↑ or PF ↓,

so that P=ePF, NX=0

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Arbitrage 2: The nominal exchange rate adjusts to equalize the cost

of a basket of goods across countries. If real exchange rate = P/ePF <1

(1) P<ePF NX>0 demand for NT$↑ e*↓( 升值 )

(2) 若未升值，但預期升值，則熱錢流入 (Arbitrage): buy NT$ and sell it later. US$1 NT$33 US$ (33/28) = US$1.18

As demand for NT$↑, the value of NT$↑ e*↓

民 74 年以前， 1 美元兌換新台幣 36-40 元左右。由於國際美元走弱及中美貿易逆差擴大，美國開始壓迫我國新台幣升值，中央銀行採緩慢升值方式，因而導致國外熱錢大量流入國內。 78 年元月，新台幣收盤價為 28 元兌 1 美元。

78

Implications of PPPLR: P depends on Ms ； PF depends on MF

s △e* 例如： M↑ P↑依據 PPP ( e* = P/PF) … e*↑ （貶值）

When CB prints large quantities of money, the money loses value both in terms of goods it can buy and in terms of the amount of other currencies it can buy.

the currency depreciates relative to other currencies.

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Implications of PPP1. PPP 較鬆的條件： 1 改為常數 ε = P/ePF = c, e = P/ (εPF )= P/cPF

2. 與之前 e 決定的公式相比：此處指貿易條件不變，即亦是 For a given value of ε, the growth rate of e equals the difference bet

ween domestic and foreign inflation rates. The higher the domestic inflation rate, the greater the depreciation of dom

estic currency.

FF

F

P

P

P

P

e

e

0

0

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Does PPP hold in the real world? No, for two reasons:

1. International arbitrage not possible. nontraded goods (非貿易財 ) transportation costs

2. Different countries’ goods not perfect substitutes.

Nonetheless, PPP is a useful theory: It’s simple & intuitive In the real world, nominal exchange rates

tend toward their PPP values over the long run.

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Fig 5-14: NX is highly sensitive to small movements in εunder PPP very flat NX scheduleIf ε = 1

→ the NX curve is horizontal

:

ε

NX

NXε = 1

S I Under PPP, changes in (S – I ) have no impact on ε or e.

Under PPP, changes in (S – I ) have no impact on ε or e.

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Alternative :Interest rate parity 利率平價理論補充 PPP連結利率、當期匯率、與遠期匯率。

83

Summary

( )

:

1*

*

F

F

F

F

F

Y C I G NX

S Y C G I NX

S I NCO

NX NCO

nominal exchange rate e

Q Preal exchange rate

Q eP

PPP theory LR equilibrium

Q Preal exchange rate

Q e P

Por e

P

84

SummaryOpen Macro Model: two markets are central(1) LF Market: S = I + NCO(2) FE Market: NCO = NX

1. Large Open Economy: NCO links the LF market and FE market. r and εadjust simultaneously to achieve equilibrium

2. Small Open Economy: r=r*, NCO=S-I(r*) + NX ε*

Comparative Statics

1 Ch 5 The Open Economy Mankiw: Macro Ch 5 and Appendix Mankiw: Econ Ch31, Ch32.

Documents

Transcript of 1 Ch 5 The Open Economy Mankiw: Macro Ch 5 and Appendix Mankiw: Econ Ch31, Ch32.