end of 14 and 15

end of 14 and 15 - A MACROECONOMIC THEORY OF THE OPEN...

Info iconThis preview shows pages 1–4. Sign up to view the full content.

View Full Document Right Arrow Icon

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

View Full Document Right Arrow Icon

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

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: A MACROECONOMIC THEORY OF THE OPEN ECONOMY 30 CASE STUDY: Capital Flows from China In recent years, China has accumulated U.S. assets to reduce its exchange rate and boost its exports. Results in U.S.: ___________of $ relative to Chinese renminbi ________ U.S. imports from China ________U.S. trade deficit Some U.S. politicians want China to stop, argue for restricting trade with China to protect some U.S. industries. Yet, U.S. consumers benefit, and the net effect of China’s currency intervention is probably small. A MACROECONOMIC THEORY OF THE OPEN ECONOMY 31 Political Instability and Capital Flight 1994: Political instability in Mexico made world financial markets nervous. People worried about the safety of Mexican assets they owned. People ______ many of these assets, pulled their capital out of Mexico. Capital flight : a large and sudden reduction in the ________ for assets located in a country We analyze this using our model, but from the prospective of Mexico, not the U.S. A MACROECONOMIC THEORY OF THE OPEN ECONOMY 32 . Political instability makes investors nervous. This leads to a _____ of capital. As NCO____ DLF____. This causes r to ______ But overall NCO will ______. D 1 Capital Flight from Mexico r NCO NCO 1 r 1 Net capital outflow r LF S 1 r 1 Loanable funds D 2 A MACROECONOMIC THEORY OF THE OPEN ECONOMY 33 Capital Flight from Mexico The increase in NCO causes an increase in the _______of pesos in the foreign exchange market. The real exchange rate value of the peso_____. Market for foreign- currency exchange E Pesos D 1 S 1 = NCO 1 E 1 Ex a m p l e s o f C a p i ta l Fl i g h t: M e x i co , 1 9 9 4 0 .1 0 0 .1 5 0 .2 0 0 .2 5 0 .3 0 0 .3 5 10/23/1994 11/12/1994 12/2/1994 12/22/1994 1/11/1995 1/31/1995 2/20/1995 3/12/1995 4/1/1995 US Dollars per currenc . E x a m p l e s o f C a p i ta l F l i g h t: S .E . A s i a , 1 9 9 7 2 0 4 0 6 0 8 0 1 0 0 1 2 0 12/1/1996 2/24/1997 5/20/1997 8/13/1997 11/6/1997 1/30/1998 4/25/1998 7/19/1998 US Dollars per curren . 1/1/1997 = 100 S o u th K o re a W o n T h a i B a h t In d o n e s ia R u p ia h...
View Full Document

{[ snackBarMessage ]}

Page1 / 13

end of 14 and 15 - A MACROECONOMIC THEORY OF THE OPEN...

This preview shows document pages 1 - 4. Sign up to view the full document.

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