2010-ECON 202 L19 (2)

2010-ECON 202 L19 (2) - ECON202 Viv Hall, SEF VUW L19...

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Unformatted text preview: ECON202 Viv Hall, SEF VUW L19 djustments under Fixed Exchange Rate Regimes, and Alternative Exchange Rate Policy Regimes 1. Some key points 2. Fixed exchange rate AD and AS revisited: adjustments without and with a devaluation 3. Fixed exchange rates, and exchange rate crises 4. Pros and Cons of fixed/pegged and flexible exchange rate regimes 5. A Common Currency area, or some form of Hard Peg regime ? Blanchard 5/e, chapters 20-5, 21-1, 21-2, 21-4 ECON202 Viv Hall, SEF VUW Some key points : (1) Under fixed exchange rates , in the face of shocks to Aggregate Demand, macroeconomic adjustment (back to Y n ) can take place through two basic ways:- naturally , i.e. via price level adjustments over time; and/or- perhaps faster if the monetary authority abandons the peg ? The latter can result in loss of credibility and be associated with an exchange rate crisis . ECON202 Viv Hall, SEF VUW Some key points : (2) In the face of a crisis , the monetary authority and/or government has several options available . There are pros and cons to both fixed and flexible exchange rates Should a common currency area be considered? What about two strong forms of fixed exchange rate (or hard peg ) regime? Perhaps a currency board or dollarization. ECON202 Viv Hall, SEF VUW Fixed exchange rate AD and AS revisited : adjustments without and with a devaluation : (1) Recall the variable definitions, and the specification of AD and AS for an Open Economy: Floating rate regime : (+) (+)(-) (+) (+) (-) (-) AD Open/Floating : Y = Y[ M/P , G, T, Y*, i*, E e , P/P* ] Fixed rate regime : (+) (-) (+) (-) (-) (-) AD Open/Fixed : Y = Y[G, T, Y*, i*, , P/ P* ] AS for both regimes: (+) (+) (-) (+) (+) AS Open P = P e [1 + ( , ( P iii /E ))] F(1- (Y/L), z ) ECON202 Viv Hall, SEF VUW Fixed exchange rate AD and AS revisited : adjustments without and with a devaluation : (2) Assuming the economy starts where output is below the natural rate, i.e. Y 0 < Y n ....
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2010-ECON 202 L19 (2) - ECON202 Viv Hall, SEF VUW L19...

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