国际金融教学课件：IF-lecture7 The Monetary Approach to Balance-of-Payments and Exchange-Rate Determination.ppt

Click to edit Master title style,Click to edit Master text styles,Second level,Third level,Fourth level,Fifth level,Daniels and VanHoose,Monetary Approach,*,The Monetary Approach to Balance-of-Payments and Exchange-Rate Determination,Introduction,The Monetary Approach focuses on the supply and demand of money and the money supply process.,The monetary approach hypothesizes that BOP and exchange-rate movements result from changes in money supply and demand.,Daniels and VanHoose,2,Monetary Approach,Small Country Example,A small country is modeled as:,(1),M,d,=,kPy,(2)M=m(DC+FER),(3)P=SP,*,and,in equilibrium,(4),M,d,=M.,Daniels and VanHoose,3,Monetary Approach,Small Country Model,The balance of payments is defined as:,(5)CA+KA=FER.,For example,if FER 0,then CA+KA,kP,*,Sy,There is pressure for the domestic currency to depreciate.The central bank must sell FER until M=M,d,.,m(DC,+FER,)=KP,*,Sy,Daniels and VanHoose,7,Monetary Approach,Small Country Model,There has been no net impact on the monetary base and money supply as the change in FER offset the change in DC.,There results,however,a balance of payments deficit as,FER,kP,*,Sy,.,Now the domestic currency must depreciate to balance money supply and money demand,m(DC,+FER)=,kP,*,Sy.,Daniels and VanHoose,10,Monetary Approach,Small Country Model,The monetary approach postulates that changes in a nations balance of payments or exchange rate are a monetary phenomenon.,The small country illustrates the impact of changes in domestic credit,foreign price shocks,and changes in domestic real income.,Daniels and VanHoose,11,Monetary Approach,The Portfolio Approach to Exchange-Rate Determination,The Portfolio Approach,The portfolio approach expands the monetary approach by including other financial assets.,The portfolio approach postulates that the exchange value is determined by the quantities of domestic money and domestic and foreign financial securities demanded and the quantities supplied.,Daniels and VanHoose,13,Monetary Approach,The Portfolio Approach,Assumes that individuals earn interest on the securities they hold,but not on money.,Assumes that households have no incentive to hold the foreign currency.,Hence,wealth(W),is distributed across money(M)holdings,domestic bonds(B),and foreign bonds(B*).,Daniels and VanHoose,14,Monetary Approach,The Portfolio Approach,A domestic households stock of wealth is valued in the domestic currency.,Given a spot exchange rate,S,expressed as domestic currency units relative to foreign currency units,a wealth identity can be expressed as:,W,M+B+SB*.,Daniels and VanHoose,15,Monetary Approach,The Portfolio Approach,The portfolio approach postulates that the value of a nations currency is determined by quantities of these assets supplied and the quantities demanded.,In contrast to the monetary approach,other financial assets are as important as domestic money.,Daniels and VanHoose,16,Monetary Approach,An Example,Suppose the domestic monetary authorities increase the monetary base through an open market purchase of domestic securities.,As the domestic money supply increases,the domestic interest rate falls.,With a lower interest,households are no longer satisfied with their portfolio allocation.,The demand for domestic bonds falls relative to other financial assets.,Daniels and VanHoose,17,Monetary Approach,Example-Continued,Households shift out of domestic bonds.,They substitute into domestic money and foreign bonds.,Because of the increase in demand for foreign bonds,the demand for foreign currency rises.,All other things constant,the increased demand for foreign currency causes the domestic currency to depreciate.,Daniels and VanHoose,18,Monetary Approach,Spot Exchange Rate,Domestic currency units/foreign currency units,Quantity of,foreign currency.,S,FC,D,FC,D,FC,S,1,S,2,Q,1,Q,2,Daniels and VanHoose,19,Monetary Approach,