国际金融课件chap05-Whata-Determines-Exchange-Rates

Chapter05WhatDeterminesExchangeRates?Thinkingintermsofsupplyanddemandisanecessaryfirststeptowardunderstandingexchangerates.Thenextstepistheonethathastobetakeninanymarketanalysis:findingoutwhatunderlyingforcescausesupplyanddemandtochange.Sincethegeneralshifttofloatingexchangeratesintheearly1970s,exchangeratesbetweentheU.S.dollarandothermajorcurrencieshavebeenvariableorvolatile.Figure5.1remindsusjusthowvariableexchangerateshavebeen.(PanelA)PanelBThechartssuggestthreetypesofvariability.First,therearelong-termtrendsinwhichsomecurrenciestendtoappreciateagainstthedollar,andotherstendtodepreciate.Second,therearemedium-termtrendswhicharesometimescountertothelongertrends.Third,thereisasubstantialvariabilityduringtheshortrun(frommonthtomonth,andindeed,fromdaytoday,hourtohour,andevenminutetominute).Whydoweseelargechangesinthevaluesoffloatingexchangerates?Howdoesshort-runvariabilityturnintolong-runtrends?Whyaremedium-runtrendssometimesoppositetotheselongertrends?5.1ExchangeRatesintheShortRun5.2TheLongRun:PurchasingPowerParity(PPP)5.3TheLongRun:TheMonetaryApproach5.4ExchangeRateOvershooting5.5HowWellCanWePredictExchangeRates5.1

ExchangeRatesintheShortRunToanalyze,weusetheconceptofuncoveredinterestparityfromchapter4.RecallthatinvestorsdeterminetheexpectedoverallreturnonanuncoveredinvestmentinabonddenominatedinaforeigncurrencybyusingThebasicreturnonthebonditself(theinterestrateoryield),andTheexpectedgainorlossoncurrencyexchanges(theexpectedappreciationordepreciationoftheforeigncurrency).Uncoveredinterestparitylinkstogetherfourvariables:thedomesticinterestrate,theforeigninterestrate,thecurrentspotexchangerateandtheexpectedfuturespotexchangerate.Changeinanyoneofthesefourvariablesimpliesthatadjustmentswilloccurinoneormoreoftheotherthree.TheRoleofInterestRatesSupposethedomesticinterestrate(i)increases,whiletheforeigninterestrate(if)andthespotexchangerateexpectedatsomeappropriatetimeinthefuture(eex)remainconstant,iftheinternationalinvestorswanttoshifttowarddomesticcurrencyassets,theyfirstneedtobuydomesticcurrencybeforetheycanbuythedomestic-currencybonds.Thisincreaseindemandfordomesticcurrencyincreasesthecurrentspotexchangeratevalueofdomesticcurrency,sotheforeigncurrencydepreciates(thehomecurrencyappreciates).Giventhespeedwithwhichfinancialinvestorscaninitiateshiftsintheirportfolios,theeffectonthespotexchangeratecanhappenveryquickly(instantaneouslyorwithinafewminutes).Forexample,page73.Iftheforeigninterestrateincreases,thentheforeigncurrencyappreciates.Thenwhathappensifbothinterestrateschangeatthesametime?Theansweristhatwhatreallymattersisthechangeintheinterestdifferentialif-i.TheRoleoftheExpectedFutureSpotExchangeRateSupposethattheinterestratedifferentialisunchanged,thefinancialinvestorsnowexpectthefuturespotexchangeratetobehigherthantheypreviouslyexpected,iftheinvestorswanttoshifttowardforeign-currencyassets,theyfirstneedtobuyforeigncurrency.Thisincreaseindemandforforeigncurrencyincreasesthecurrentspotexchangeratee.(Theforeigncurrencyappreciates;thedomesticcurrencydepreciates.)Forexample,page74.Aswithachangeininterestrates,theeffectofachangeintheexpectedfuturespotrateonthecurrentspotexchangeratecanhappenveryquickly(instantaneouslyorwithinafewminutes).Giventhepowerfuleffectswhatexchange-rateexpectationscanhaveonactualexchangerates,we’dliketoknowwhatdeterminestheseexpectations.Manydifferentthingscaninfluencethevalueoftheexpectedfutureexchangerate.First,ifexpectationssimplyextrapolaterecenttrends,thenabandwagonispossible.Speculationthenmaybebasedondestabilizingexpectations—expectationsformedwithoutregardtotheeconomicfundamentals—and(speculative)bubblescanoccur.Second,ifexpectationsarebasedonabeliefthatexchangerateseventuallyfollowPPP,thentheyleadtostabilizingspeculation—speculationthattendtomovetheexchangeratetowardavalueconsistentwiththeeconomicfundamentalsofnationalpricelevels.Third,expectationsareaffectedbyvariouskindsofnewsabouteconomicandpoliticalcircumstances.Overall,Figure5.2providesaroadmapbysummarizingtheeffects.Figure5.25.2TheLongRun:PurchasingPowerParity(PPP)Intheshortrun,floatingexchangeratesareoftenhighlyvariable,andtherearetimeswhenitisnoteasytounderstandwhytheratesarechangingastheyare.Inthelongrun,economicfundamentalsbecomedominant,providingan“anchor”forthelong-termtrends.Ourunderstandingofexchangeratesinthelongrunisbasedonthepurchasingpowerparity(PPP)hypothesis.ThreeversionsofPPParepresented:thelawofonepriceforasingleproduct,absolutePPP,andrelativePPP.TheLawofOnePriceThelawofonepricepositsthataproductthatiseasilyandfreelytradedinaperfectlycompetitiveglobalmarketshouldhavethesamepriceeverywhere,oncethepricesatdifferentplacesareexpressedinthesamecurrency.Itproposesthattheprice(P)oftheproductmeasuredindomesticcurrencywillbeequatedtotheprice(Pf)oftheproductmeasuredintheforeigncurrencythroughthecurrentspotexchangerate(e,domesticcurrency/foreigncurrency):P=e·PfBigMacindex

Forexample,usingfiguresinJuly2008:thepriceofaBigMacwas$3.57intheUnitedStates(Variesbystore)thepriceofaBigMacwas£2.29intheUnitedKingdom(Britain)(Variesbyregion)theimpliedpurchasingpowerparitywas$1.56to£1,thatis$3.57/£2.29=1.56thiscompareswithanactualexchangerateof$2.00to£1atthetime[(2.00-1.56)/1.56]*100=+28%thepoundwasthusovervaluedagainstthedollarby28%Thelawofonepriceworkswellforheavilytradedcommodities,includinggold,othermetals,crudeoilandvariousagriculturalcommodities.However,itdoesnotholdcloselyformostproductsthataretradedinternationally,includingnearlyallmanufacturedproducts.Internationaltransportcostsareimperfectlycompetitive,governmentsdonotpracticefreetrade,manymarketsareimperfectlycompetitive,firmswithmarketpowersometimesusepricediscriminationtoincreaseprofitsbychargingdifferentpricesindifferentnationalmarkets.Formanyproducts,thelawofonepricedoesnotholdclosely.

AbsolutePurchasingPowerParityAbsolutePPPpositsthatabasketofproductswillhavethesamepriceinallcountrieswhenthepricesareconvertedintoasinglecurrencyusingthemarketexchangerates.P=e·PfWherePandPfrefertotheaverageproductpriceindomesticandforeigncountry,andeistheexchangeratemeasuredasunitsofdomesticcurrencyperunitofforeigncurrency.TheequationcanberearrangedtoprovideanestimateofthespotexchangeratethatisconsistentwithabsolutePPP:e=P/PfAbsolutePPPisclearlycloselyrelatedtothelawofoneprice.However,basedontheevidence,absolutePPPdoesnotfaremuchbetterthanthelawofonepriceintherealworld.RelativePurchasingPowerParityBoththelawofonepriceandabsolutePPParepositedtoholdatapointintime.AnotherversionofPPPlooksathowthingsarechangingovertime.RelativePPPpositsthattheexchangeratewillchangetooffsetdifferencesbetweenchangesinproduct-pricelevelsindifferentcountries.Theformulais:(et/e0)=(Pt/P0)/(Pf,t/Pf,0)Wherethesubscript0indicatesvaluesintheinitialyearandthesubscripttindicatesvaluesinasubsequentyear.RelativePPPisoftendefinedusinganapproximation.Theratioofthetwoexchangeratescanbeapproximatedbythepercentagerateofappreciation(depreciationifnegative)oftheforeigncurrencyovertime.Theratioofthecountry’sproductpricelevelscanbeapproximatedbythepercentageincreaseinthepricelevelovertime,whichistheinflationrate.RelativePPPcanthenbestatedapproximatelyas:Rateofappreciationoftheforeigncurrency=π–πfWhereπandπfaretheinflationratesforthedomesticandforeigncountry.RelativePPPprovidessomestrongpredictionsaboutexchangeratetrends,especiallyinthelongterm.Itimpliesthatlow-inflationcountriestendtohaveappreciatingcurrenciesandhighinflationcountriestendtohavedepreciatingcurrencies.Infact,astrictapplicationofPPPimpliesthateachpercentagepointmoreofacountry’sinflationperyeartendstoberelatedtoa1percentfasterrateofdepreciationofthecountry’scurrencyperyear.RelativePPP:RecentExperienceIt’ssuggestedthatPPPholdsreasonablywellinthelongrun,butpoorlyintheshortrun.Figure5.3providesevidenceonthelongrunduringthecurrentperiodoffloatingexchangerates.WecanalsoexamineperformanceofPPPforbothshortandlongperiodsusingdataontheexchangeratesofindividualcountriesovertime.Figure5.4showstheactualexchangeratesagainsttheU.S.dollarandtheexchangeratesthatwouldbeconsistentwithPPPforGermanMark(DM)andJapaneseyen.TheexaminationshowsthatthereisatendencytofollowrelativePPPinthelongrun,buttherearealsosubstantialdeviationsfromrelativePPPintheshortrun.5.3TheLongRun:TheMonetaryApproachPurchasingpowerparityindicatesthat,atleastinthelongrun,exchangeratesarecloselyrelatedtothepricelevelsindifferentcountries.Butthissuggeststhenextquestion:whatdeterminestheaveragenationalpricelevels?Economistsbelievethatinthelongrun,themoneysupply(oritsgrowthrate)determinesthepricelevel(orinflationrate),throughtheequilibriumbetweenmoneysupplyandmoneydemand.Money,PriceLevels,andInflationThelinkbetweendomesticproductandthedemandforanation’smoneyiscentraltothequantitytheoryofdemandformoney.Thequantitytheoryequationsaysthatinanycountrythemoneysupplyisequatedwiththedemandformoney,whichisdirectlyproportionaltothemoneyvalueofgrossdomesticproduct.Forhomecountryandtherestoftheworld,theequationmaybe:Ms=k·P·YMsf=kf·Pf·YfWhereMsandMsfarethehomeandforeignmoneysupplies;PandPfarethehomeandforeignpricelevels;YandYfaretherealdomesticproducts(thatisrealGDP).Theexplanationofkandkf

areasfollow.Foreachcountry,thenominalormoneyvalueofGDPequalsthepriceleveltimestherealGDP(PYandPfYf).kandkfindicatetheproportionalrelationshipsbetweenmoneyholdingsandthenominalvalueofGDP.Theyrepresentpeople’sbehavior.IfthevalueofGDPandthusthevalueoftransactionsincrease,kindicatestheamountofextramoneythatpeoplewanttoholdtofacilitatethishigherlevelofeconomicactivity.Sometimesquantitytheoriesassumethattheksareconstant,sometimesnot.Thefactsarethatanykvaries.Forpresentanalysis,supposeeachmoneysupply(MsandMsf)iscontrolledbyeachcountry’smonetarypolicy,andthateachcountry’srealproduction(YandYf)isgovernedbysuchsupply-sideforcesasfactorsupplies,technology,andproductivity.Rearrangingtheterms,wecanusethequantitytheoryequationsofmoneysupplytodeterminetheratioofpricesbetweencountries:P/Pf=(Ms/Msf)·(kf/k)·(Yf/Y)MoneyandPPPCombinedCombiningPPPandthequantitytheoryequationsfortwocountries,weobtainapredictionofexchangeratesbasedonmoneysuppliesandnationalproducts:e=P/Pf=(Ms/Msf)·(kf/k)·(Yf/Y).Theequationpredictsthataforeignnationwillhaveanappreciatingcurrency(eup)ifithassomecombinationofslowermoneysupplygrowth(Ms/Msfup),fastergrowthinrealGDP(Yf/Yup),orariseintheratiokf/k.Conversely,anationwithfastmoneygrowthandastagnantrealeconomyislikelytohaveadepreciatingcurrency.Goingonestepfurther,theequationimpliesthatsomekeyelasticitiesareequalto1.Thatis,iftheratio(kf/k)staysthesame,thenerisesby1percentforEach1percentriseinthedomesticmoneysupply(Ms),orEach1percentdropintheforeignmoneysupply(Msf),orEach1percentdropindomesticrealGDP(Y),orEach1percentriseinforeignGDP(Yf).Theexchangerateelasticitiesimplysomethingelsetoo:Anexchangeratewillbeunaffectedbybalancedgrowth.Ifmoneysuppliesgrowatthesamerateinallcountries,leavingMs/Msfunchanged,andifdomesticproductsgrowatthesamerate,leavingYf/Yunchanged,thereshouldbenochangeintheexchangerate.5.4ExchangeRateOvershootingOurviewofexchangeratesasbeingdeterminedinthelongrunbypurchasingpowerparity,withitsemphasisonaverageratesofinflationovermanyyears,seemsquiteremovedfromtheviewthatexchangeratesintheshortrunarestruckbyrapidshiftsininvestor’sportfoliodecisions.Yetthetwomustberelated.Theshortruneventuallyflowsintothelongrun.Itisusefultoconsiderthisrelationshipinmoredepth,toexplorethephenomenonofovershooting.Internationalinvestorscanreactrationallytonewsbydrivingtheexchangeratepastwhattheyknowtobeitsultimatelong-runequilibriumvalue.Theactualexchangeratethenmovesslowlybacktothatlong-runratelateron.Thatis,intheshortrun,theexchangerateovershootsitslong-runvalueandthenrevertsbacktowardit.Supposethatthedomesticmoneysupplyunexpectedlyjumps10percentattimet0andthenresumestherateofgrowthinvestorshadalreadybeenexpecting.Investorsunderstandthatthispermanentincreaseof10percentshouldeventuallyraisethepriceofforeignexchangeby10percent,iftheybelievethatPPPandthemonetaryapproachholdeventually.Inthelongrun,boththedomesticpricelevel(P)andthepriceofforeignexchange(e)shouldbe10percenthigher.Tworealisticsideeffectsoftheincreaseinthedomesticmoneysupplyinterveneandmaketheexchangeratetakeastrangepathtoitsultimate10percentincrease:(1)Productpricesarestickyintheshortrun,soconsiderabletimemustpassfordomesticinflationtoraisedomesticpricesPby10percent(relativetoforeignprices).(2)Becausepricesarestickyatfirst,theincreaseinthemoneysupplydrivesdownthedomesticinterestrate,bothrealandnominal.Withthedomesticinterestrate(i)lower,thereturndifferentialshiftstofavorforeign-currencyassets.Inaddition,theexpectedfuturespotexchangerateshouldincrease.Therefore,theoverallreturndifferentialactuallyfavorsforeign-currencyassetsfortworeasons:(1)Thedomesticinterestratehasdecreased,and(2)Theforeigncurrencyisexpectedtoappreciate.Theinvestors’portfoliosrepositionincreasesthedemandforforeigncurrencyandresultsinaquickappreciationoftheforeigncurrency.Thenextquestionisbyhowmuchwilltheforeigncurrencyappreciateimmediately?Theansweristhecurrentspotexchangeratemustriseimmediatelybymorethan10percent.Afterthisrapidadjustment,themuchhigherspotratewillthenslowlydeclinebacktowarditsexpectedfuturevalue.Hereweshowshowexchangeratescanbehighlyvariableintheshortrun,whileatthesametimeeventuallychangeinthelongruninwaysconsistentwithPPP.Figure5.6showsit.Figure5.65.5HowWellCanWePredictExchangeRatesOnepurposeofhavingtheoriesisto