Econ+310+Winter+2010+-+Topic+8

Econ+310+Winter+2010+-+Topic+8 - Economics 310 Money and...

Info iconThis preview shows pages 1–7. Sign up to view the full content.

View Full Document Right Arrow Icon
Economics 310 Money and Banking Topic 8 International Finance
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
2 Lecture 1 Reading Chapter 18 Assignment 5 available on CTools Assignment
Background image of page 2
3 Lecture 1 Monetary Policy in an Open Economy Open economy is different from the closed economy in two main ways: Trade in goods Trade in (financial) assets These are linked through currency markets e: foreign price of domestic currency Balance of Payments Observe: trade in financial assets implies some discipline on the ability of the monetary authority to adjust interest rates
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
4 Lecture 1 Capital flows and the exchange rate Consider a foreign investor. Can choose between A foreign asset The foreign interest rate: i f The domestic asset The domestic interest rate: i By holding the domestic asset, one earns return not only from i , but also from the appreciation in the domestic currency If e 0 is the current nominal exchange rate e 1 is the nominal exchange rate expected to prevail in the future then the return on domestic asset is: i + (e 1 – e 0 )/e 0
Background image of page 4
5 Lecture 1 Capital flows and the exchange rate Return from holding foreign asset: i f Expected return from holding domestic asset: i + e 1 – e 0 e 0 If capital moves freely we anticipate i = i f – (e 1 – e 0 )/e 0 Interest Parity Condition
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
6 Lecture 1 Example Suppose US Treasury bond has i = 0.05 European Treasury bond has i f = 0.1 If capital flows very easily between the two locations US$ is anticipated to appreciate relative to the € by 5%. If interest parity condition is not satisfied, there will be
Background image of page 6
Image of page 7
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 09/28/2010 for the course ECON 310 taught by Professor Hogan during the Winter '08 term at University of Michigan.

Page1 / 23

Econ+310+Winter+2010+-+Topic+8 - Economics 310 Money and...

This preview shows document pages 1 - 7. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online