IFchapter 8B Forex II国际金融论第八章第二节.docx

IFchapter 8B Forex II国际金融论第八章第二节.docx

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IFchapter8BForexII国际金融论第八章第二节

IF2008–Chapter8B

HowistheExchangeRatesDetermined?

I.InternationalParityTheory

¢TheLawofOnePriceforOneGood

¢InterestRateParityTheory

¢PurchasingPowerParityTheory

¢FisherEffect

¢ExpectationTheory

¢InternationalFisherEffect

II.MacroeconomicApproaches

¢BalanceofPaymentApproach（KeynesianModel）

1.theElasticityApproachModel

2.Mundell-FlemmingModel

¢CapitalMarketApproach

3.theFlexiblePriceModel

4.OvershootingTheory（DornbuschTheory;theStickyPriceModel）

5.PortfolioBalanceTheory

¢OtherApproaches

6.laTheoriePsycologiqueduChange

7.NewsModel

I.InternationalParityTheory

¢TheLawofOnePriceforOneGood

¢Thislawstatesthatidenticalgoodsmusthaveidenticalprices

8.Thislawstipulatesthattwomarketsareintegratedwhenidentical

goodsorassetsarepricedidenticallyacrossborders

¢Thistheoryimpliescompetitivemarket:

◆Nobarrierstotrade

◆Notransactioncost

◆Perfectinformation

¢Example:

✓anounceofgoldshouldhavethesameprice（expressedin

U.S.dollars）inLondonasitdoesinZurich

✓otherwisegoldwouldflowfromonecitytotheother

（theroleofarbitragers）

¢PurchasingPowerParityTheory

¢Spotexchangeratesbetweencurrencieswillchangetothedifferentialininflationratesbetweencountries

.

¢ABSOLUTEPURCHASINGPOWERPARITY

9.Pricelevelsadjustedforexchangeratesshouldbeequalbetweencountries

10.Oneunitofcurrencyhassamepurchasingpowerglobally.

11.

¢RELATIVEPURCHASINGPOWERPARITY

12.theexchangerateofonecurrencyagainstanotherwilladjusttoreflectchangesinthepricelevelsofthetwocountries.

13.Inmathematicalterms:

et=futurespotrate

e0=spotrate

ih=homeinflation

if=foreigninflation

t=thetimeperiod

14.

Ifpurchasingpowerparityisexpectedtohold,thenthebestpredictionfortheone-periodspotrateshouldbe

15.Amoresimplifiedbutlesspreciserelationshipis

16.thepercentagechangeshouldbeapproximatelyequaltotheinflationratedifferential.

¢PPPsaysthat

17.Thecurrencywiththehigherinflationrateisexpectedtodepreciaterelativetothecurrencywiththelowerrateofinflation.

◆BigMacIndex（BMI）

●BMIisbasedonthetheoryofpurchasing-powerparity

●Thenotion:

adollarshouldbuythesameamountinallcountries.

●Inthelongrun,theexchangeratebetweentwocountriesshouldmovetoward

theratethatequalizesthepricesofanidenticalbasketofgoodsandservicesineachcountry

●The"basket"isaMcDonald'sBigMac,whichisproducedinabout120countries

●TheBigMacPPPistheexchangeratethatwouldmeanhamburgerscostthe

sameintheUnitedStatesasabroad.

●ComparingactualexchangerateswithPPPsindicateswhetheracurrencyis

under-orovervalued.

●Example:

NewYork:

$3.10

Beijing:

15.5RMB（=$2.15）

BigMacPPP=$2.15/$3.10*100=69.3%

30.7%under-valued

●TheEconomist’sBigMacPriceIndex（2006）

⏹US$3.10

⏹UK£1.94$3.82

⏹Japan¥250$2.11

⏹SwissSfr6.30$5.18

⏹EuroArea€2.94$3.88

⏹China10.5RMB$1.34

¢InterestRateParityTheory

¢TheTheorystates:

18.theforwardrate（F）differsfromthespotrate（S）atequilibriumbyanamountequaltotheinterestdifferential（rh-rf）betweentwocountries.

¢Theforwardpremiumordiscountequalstheinterestratedifferential.

（F-S）/S=（rh-rf）

rh=thehomerate

rf=theforeignrate

¢

Inequilibrium,returnsoncurrencieswillbethesame

-Noprofitwillberealizedandinterestparityexistswhichcanbewritten

¢InterestRateParitystates:

1.Higherinterestratesonacurrencyoffsetbyforwarddiscounts.

2.Lowerinterestratesareoffsetbyforwardpremiums.

¢FisherEffect

¢FisherEffectstates:

19.Nominalinterestrates（r）areafunctionoftherealinterestrate（a）andapremium（i）forinflationexpectations.

R=a+i

¢RealRatesofInterest

1.Shouldtendtowardequalityeverywherethrougharbitrage.

2.Withnogovernmentinterferencenominalratesvarybyinflationdifferential

rh-rf=ih-if

¢AccordingtotheFisherEffect,

20.countrieswithhigherinflationrateshavehigherinterestrates

¢Duetocapitalmarketintegrationglobally,interestratedifferentialsareeroding.

¢ExpectationTheory（THEUNBIASEDFORWARDRATEMODEL）

¢ExpectationTheorystates

✓Iftheforwardrateisunbiased,thenitshouldreflecttheexpectedfuturespotrate.

✓Statedas

ft=et

¢TheoryImplication:

Market-BasedForecast

✓Thecurrentforwardratecontainsimplicitinformationaboutexchangeratechangesforoneyear.

✓Interestratedifferentialsmaybeusedtopredictexchangeratesbeyondoneyear.

¢InternationalFisherEffect（IFE）

¢IFESTATES:

21.thespotrateadjuststotheinterestratedifferentialbetweentwocountries

22.IFE=PPP+FE

¢SimplifiedIFEequation:

（ifrfisrelativelysmall）

¢Fisherpostulated

1.Thenominalinterestratedifferentialshouldreflecttheinflationrate

differential

2.Expectedratesofreturnareequalintheabsenceofgovernmentintervention.

¢ImplicationsofIFE

1.Currencywiththelowerinterestrateisexpectedtoappreciaterelativetothe

onewithahigherrate.

2.Financialmarketarbitrageinsuresinterestratedifferentialisanunbiasedpredictorofchangeinfuturespotrate.

INTERNATIONALPARITYTHEORY-SUMMARY

InflationRates

Differential

Pｈ^-Pｆ^

InterestRates

Differential

iｈ–if

FisherEffect

PurchasingPowerParity

InterestRateParityTheory

InternationalFisherEffect

ExpectedChangeof

SpotRate

（S^-S）/S

DifferentialinSpotRate&ForwardRate

（F–S）/S

Expectation

Theory

III.MacroeconomicApproaches

A.BalanceofPaymentAccount

¢BalanceofPayment（BOP）Account

1.recordalltheeconomictransactionsinaspecifictimeintervalbetweenresidentsofacountryandtherestoftheworld.

¢Twotypesoftransactions:

1.CurrentAccount:

Transactionsthatinvolvesgoodsandservices

2.CapitalAccount:

Transactionsthatinvolvesassets

◆Paymenttoforeigners:

debit（-）

◆Receiptfromforeigners:

credit（+）

¢BalanceofPaymentApproach（KeynesianModel）

a）TheElasticityApproachModel（CurrentAccountcentered）

S=f（P/P*,Y-Y*,r-r*,Z）

S:

exchangerate

P:

domesticpricelevelP*:

foreigncountry’spricelevel

Y:

domesticrealincomeY*:

foreigncountry’srealincome

r:

domesticinterestrater*:

foreigncountry’sinterestrate

z:

otherfactors

●

ForeignCurrency

SupplyDOWN

DemandUP

ImportUP

ExportDOWN

ExchangeRate

UP

Domestic

Price

UP

TheImpactofDomesticPriceLevelChange

●TheImpactofDomesticIncomeChange

NationalIncomeUPImportDemandUPCurrentAccount（-）

ExchangeRateUP

●TheImpactofInterestRateChange

InterestRateUPForeignCurrencies（+）ExchangeRateDOWN

b）Mundell-FlemingModel（CapitalAccountConsidered）

●TheMundell-Flemingmodelfocusesontheshorttomediumrun

●Themodellaysoutthepolicyoptionsandtheresponsestoinsideandoutsideshocksforanopeneconomythatinteractswithothercountriesviatradeingoodsandservicesaswellascross-bordercapitalflows.

●BP=CA+KA=（X–IM）+k（r–r*）=0

k:

capitalflowsensitivitytointerestratedifferentials

●Thedifferentialofinterestratesimpactstheflowofthecapitalaccount

IV.CapitalMarketApproach

1.theFlexiblePriceModel

◆FocusonMoneySupplyandDemandamongvariousfinancialassets

◆Pricesaresufficientlyflexiblemarketclearsallthechangeseffectively

◆ConditionsforBalance

✧DomesticMarket:

M/P=L（Y,r）

✧ForeignMarket:

M*/P*=L*（Y*,r*）

M:

moneysupply,L:

moneydemand

✧Then,

S=P/P*=M/M*×[L*（Y*,r*）/L（Y,r）]

✧Accordingtothismodel

⏹DomesticmoneysupplyUPExchangeRageUP

⏹DomesticincomeUPMoneyDemandUP

DomesticCurrencyValueUPExchangeRateDOWN

（theoppositeresultfromKeynsianModel）

b）OvershootingTheory（DornbuschTheory;theStickyPriceModel）

¢Dornbuschmodelisaanhybrid:

✓short-runfeaturesastheMundell-Flemingmodel

✓long-runfeaturesasintheMonetaryModel.

¢Stickypricemodel:

✓pricesarefixedintheshortrun

✓theyadjustslowlytowardsthelongrunequilibrium

¢Mainfeatures:

✓dichotomybetweenspeedofadjustmentin

◆goods-slow

◆financialmarkets–instantaneous

¢Mainresult:

overshooting

✓Instabilityofexchangeratescanbetheresultofinteractionofsluggish

adjustmentongoodsmarkets/instantaneousadjustmentonassetmarkets

P1

P0

S0S1S2

Exchange

Rate

Price

S=P–P*

◆Initialbalance–（P0,S0）

◆MoneySupplyUPlong-termequilibriummovesalongtheS=P–P*（45°）

◆Long-TermEquilibrium–（P1,S1）

◆Duetothestikypriceofgoods,pricelevelmaintainsatP0

◆Then,theincreaseinmoneysupplyresultsinthelowerinterestrateintheshort-term

◆ExchangeratewillbehighertoS2（‘overshooting’）

◆Short-termequilibrium–（P0,S2）

◆

S2

S1

S0

ExchangeRate

Astimepassesby,thepricesofgoodsrise,theequilibriummovestolong-termequilibrium（P1,S1）

Time

c）PortfolioBalanceTheory

¢Thistheoryco