Lecture 19 - Spring 2010 - Lecture 19 Alternative Views on...

Info iconThis preview shows pages 1–5. Sign up to view the full content.

View Full Document Right Arrow Icon
Lecture 19 1 of Professor David Lee AEM-ECON 2300 Alternative Views on Foreign Exchange Rate Determination “Elasticity” approach Concern about inherent instability of foreign exchange rate Chronic trade deficits thought to lead to an inherent tendency toward currency depreciation. Problem “solved” by Marshall-Lerner condition for market stability: to improve a country’s trade balance, sum of elasticities of foreign demand for domestic currency (e.g., exports) and domestic demand for foreign currency (e.g., imports) must be > 1.0: ε X + ε M > 1 A real devaluation will yield a stable outcome if Marshall- Lerner condition is met.
Background image of page 1

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

View Full DocumentRight Arrow Icon
Lecture 19 2 of Professor David Lee AEM-ECON 2300
Background image of page 2
Lecture 19 3 of Professor David Lee AEM-ECON 2300 Alternative Views on Foreign Exchange Rate Determination Balance of payments or “absorption” approach Given: GNP = Y = C + I + G + (X – M) Net exports (“BOP”) = Y – C – I – G = Domestic money income – total domestic expenditures (“absorption”) • Approach recognizes that a country’s macroeconomic policies can have unequal effects on income and expenditures. A currency devaluation will improve a country’s trade balance only if national output increases relative to absorption. • Refocused interest on trade balance and on government policies which differentially influence national income and BOP/current account. • Also focuses on “equilibrium exchange rate” – the exchange rate that reconciles national balances (unemployment and inflation) and external (current account) balance.
Background image of page 3

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

View Full DocumentRight Arrow Icon
Lecture 19 4 of Professor David Lee AEM-ECON 2300 Alternative Views on Foreign Exchange Rate Determination Monetarist approach Focuses on monetary policy, money supply and excess S and D for money as primary determinant of foreign exchange outcomes. A devaluation typically leads to an improvement in BOP/current
Background image of page 4
Image of page 5
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 17

Lecture 19 - Spring 2010 - Lecture 19 Alternative Views on...

This preview shows document pages 1 - 5. Sign up to view the full document.

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