lecture3 - Overview • Last time, Chapter 13: The foreign...

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Unformatted text preview: Overview • Last time, Chapter 13: The foreign exchange market. We found an equilibrium exchange rate, but we took each country’s interest rates R$ and R€ as given. • Today, Chapter 14 Part 1: Where do R$ and R€ come from? The money market: money supply and demand. This will be familiar from intermediate macro. • The new twist: How does money market relate to ForEx market? How does it affect exchange rate determination? • Note: Homework 1 is due Wednesday. Money market overview • Money market: demand M d and supply M s . • The market-clearing price is the interest rate R. • Important characteristic of money: it is liquid enough to be used as a means of payment to buy goods. • Include here cash (M0) and checking deposits. Sum is called M1. • Exclude the large bank deposits traded by participants in the foreign exchange market. They are typically in a form that is less liquid. • Money supply : we regard as set by the central bank. • That is, for the moment we consider it to be an exogenous policy variable that we take as given. • In more refined models it might be endogenous: e.g., the central bank may follow a policy rule . Aggregate Money Demand recap • Money demand (M d ) is a function of three variables: – Interest rate (R): What could earn on an alternative asset. Opportunity cost, since money pays no interest. If R asset....
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This note was uploaded on 04/14/2010 for the course ECON 351 taught by Professor Prodan during the Spring '10 term at University of Alabama - Huntsville.

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lecture3 - Overview • Last time, Chapter 13: The foreign...

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