Note202_05 - Macroeconomics Theory and Policy Financial...

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Macroeconomics Theory and Policy Masoud Anjomshoa 1 Masoud Anjomshoa 1 Financial Market in Open Economies: . W ealth M B * B Demand and supply of money in open economies are still the same as closed economy. So the LM curve in open economies is the same as close economies: The right combination of domestic and foreign assets (B and B*) is depending on UIP relation: E E E * i i t t e 1 t + < + E E E * i i t t e 1 t + > + Masoud Anjomshoa 2 Then E = Financial Market in Open Economies Uncovered Interest Parity Condition: . If i = i* Î t t e 1 t E E E * i i : UIP + = + e e 1 t E E fixed is rate exchange expected Suppose = + 1 E E * i i e = E i O Given i*, e E
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Macroeconomics Theory and Policy Masoud Anjomshoa 2 Masoud Anjomshoa 3 e E E = Financial Market in Open Economies Uncovered Interest Parity Condition: . If i increases: Î Î Î Î Î Î E i UIP i=i* O 1- Suppose domestic interest rate, i, increases: i 1 1 1 e 1 E E E * i i + = Masoud Anjomshoa 4 e E E = Financial Market in Open Economies Uncovered Interest Parity Condition: . If i* increases: Î Î Î Î Î Î E i UIP i=i* O 2- Suppose foreign interest rate, i*, increases: i 1 * 1 1 e * 1 E E E i i + =
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Macroeconomics Theory and Policy Masoud Anjomshoa 3 Masoud Anjomshoa 5 e E E = Financial Market in Open Economies Uncovered Interest Parity Condition: . If Ē e increases: Î Î Î Î Î Î E i UIP i=i* O 3- Suppose market expects nominal depreciation: Ē e 1 1 e 1 E E E * i i + = UIP 1 Masoud Anjomshoa 6 IS/LM Curves in Open Economies: . fixed are * P P, : Run Short P / * EP : RER = ε ) *, Y , Y ( NX G ) i , Y ( I ) T (Y c c Y : IS ML 1 o + + + ε + + + + = ) i ( L Y P M : LM = * i i 1 E E : UIP e + = ) * i i 1 E *, Y , Y ( NX G ) i , Y ( I ) T (Y c c Y : IS ML e 1 o + + + + + + + + = ) i ( L Y P M : LM =
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Macroeconomics Theory and Policy Masoud Anjomshoa 4 Masoud Anjomshoa 7 IS/LM Curves in Open Economies: .
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Note202_05 - Macroeconomics Theory and Policy Financial...

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