国际金融chapter 9

国际金融chapter 9

CHAPTER 9Internal and External Balance with Fixed Exchange RatesMcGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.

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Chapter Outline The Balance OF Payments & Money Supply Monetary Policy under a Fixed Exchange Rate Regime Fiscal Policy under a Fixed Exchange Rate Regime

Imbalances and policy Responses

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THE BALANCE OF PAYMENTS & MONEY SUPPLY

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Figure 9.2 Money Expansion: Fixed Exchange Rate

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Figure 9.3 Adjustment: Initial Payments Surplus

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Sterilization P229

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Types of Fixed EXR Regimes Traditional Fixed Exchange Rate Regime: Gov’t sets a fixed level for the exchange rate. Central bank intervenes in FX market to maintain EXR fix. Requires Central bank to hold credible levl of Int’l Reserves.

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Types of Fixed EXR Regimes Exchange Rate Bands: Gov’t sets a “band” around a fixed level for exchange rate. Central bank intervenes if EXR moves outside bands. Requires Central bank to hold credible level of Int’l Reserves.

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Types of Fixed EXR Regimes Currency Board: Gov’t sets a fixed level for exchange rate. Currency Board issues domestic currency only to extent it can be backed 100% by Int’l Reserves. Currency Board conducts no independent monetary policy.

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Monetary Policy under a Fixed Exchange Rate Regime

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Monetary Policy with Fixed EXR Look at effects of decrease in money supply through lower DR. Direct Effect– Decrease in Ms shift LM Curve inwards. – No Direct effect on either BP or IS Curves. – New internal equilibrium where new LM and IS Curves intersect. Both Y and i increase at new intersection. This is not overall equilib.!!

– BoP at this point is always in surplus regardless of capital mobility.McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.

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Indirect Effects (Automatic Adjustment to New Equilibrium)– BoP surplus means that IR will increase, results in increase in Ms. This shifts the LM Curve outwards until get back to original equilibrium.

– Monetary policy is ineffective under Fixed Exchange rate Regime Independent monetary policy is not possible as Central B

ank must intervene to keep EXR at set level.

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Monetary Policy & Capital MobilityCapital Completely Immobile i BP0 LM1 i LM1 LM0 BP0 i1 = i0 i* Capital Perfectly Mobile

LM0

IS0 Y0 Y Y0 = Y1

IS0 Y

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Monetary Policy & Capital Mobilityi Capital Relatively Immobile BP0 LM1 LM0 BP0 i1 = i0 i1 = i0 Capital Relatively Mobile i LM1 LM0

IS0 Y0 = Y1 Y Y0 = Y1

IS0 Y

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国际金融chapter 9

Fiscal Policy under a Fixed Exchange Rate Regime

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Fiscal Policy with Fixed EXR Look at effects of increase in gov’t spending, G.

Direct Effect– Increase in G will shift IS Curve outwards. – No Direct effect on either BP or LM Curves. – New internal equilibrium where LM and new IS intersect. Both Y and i increase at new intersection. This is not overall equilib.!!

– What is status of BoP at this point? Depends on capital mobility.

Indirect Effects (Automatic Adjustment to New Equilibrium)– If capital is relatively immobile BOP < 0, Int’l Reserves fall as Central Bank tries to keep EXR fixed This shifts the LM Curve backwards until IS-BP-LM all intersect.

– If capital is relatively mobile BOP > 0, Int’l Reserves rise as Central Bank tries to keep EXR fixed This shifts the LM Curve outwards until IS-BP-LM all intersect.McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.