ch16-Output-and-the-Exchange-Rate-in-the-Short-Run.ppt

《ch16-Output-and-the-Exchange-Rate-in-the-Short-Run.ppt》由会员分享，可在线阅读，更多相关《ch16-Output-and-the-Exchange-Rate-in-the-Short-Run.ppt（63页珍藏版）》请在淘文阁 - 分享文档赚钱的网站上搜索。

1、Chapter 16Output and the Exchange Rate in the Short RunPrepared by Iordanis PetsasTo Accompany International Economics:Theory and PolicyInternational Economics:Theory and Policy,Sixth Editionby Paul R.Krugman and Maurice Obstfeld1Chapter OrganizationDeterminants of Aggregate Demand in an Open Econom

2、yThe Equation of Aggregate DemandHow Output Is Determined in the Short RunOutput Market Equilibrium in the Sort Run:The DD ScheduleAsset Market Equilibrium in the Short Run:The AA ScheduleShort-Run Equilibrium for an Open Economy:Putting the DD and AA Schedules Together2Temporary Changes in Monetary

3、 and Fiscal PolicyInflation Bias and Other Problems of Policy FormulationPermanent Shifts in Monetary and Fiscal PolicyMacroeconomic Policies and the Current AccountGradual Trade Flow Adjustment and Current Account DynamicsSummaryChapter Organization3Appendix I:The IS-LM Model and the DD-AA ModelApp

4、endix II:Intertemporal Trade and Consumption DemandAppendix III:The Marshall-Lerner Condition and Empirical Estimates of Trade ElasticitiesChapter Organization4Determinants of Aggregate Demand in an Open EconomyAggregate demandThe amount of a countrys goods and services demanded by households and fi

5、rms throughout the world.The aggregate demand for an open economys output consists of four components:Consumption demand(C)Investment demand(I)Government demand(G)Current account(CA)6Determinants of Consumption DemandConsumption demand increases as disposable income(i.e.,national income less taxes)i

6、ncreases at the aggregate level.The increase in consumption demand is less than the increase in the disposable income because part of the income increase is saved.Determinants of Aggregate Demand in an Open Economy7Determinants of the Current AccountThe CA balance is viewed as the demand for a count

7、rys exports(EX)less that countrys own demand for imports(IM).The CA balance is determined by two main factors:The domestic currencys real exchange rate against foreign currency(q=EP*/P)Domestic disposable income(Yd)Determinants of Aggregate Demand in an Open Economy8There are two effects of a real e

8、xchange rate:Volume effect The effect of consumer spending shifts on export and import quantitiesValue effect It changes the domestic output worth of a given volume of foreign imports.Whether the CA improves or worsens depends on which effect of a real exchange rate change is dominant.We assume that

9、 the volume effect of a real exchange rate change always outweighs the value effect.Determinants of Aggregate Demand in an Open Economy10How Disposable Income Changes Affect the Current AccountAn increase in disposable income(Yd)worsens the CA.A rise in Yd causes domestic consumers to increase their

10、 spending on all goods.Determinants of Aggregate Demand in an Open Economy11The four components of aggregate demand are combined to get the total aggregate demand:D=C(Y T)+I+G+CA(EP*/P,Y T)This equation shows that aggregate demand for home output can be written as:D=D(EP*/P,Y T,I,G)The Equation of A

11、ggregate Demand13Real Income and Aggregate DemandA rise in domestic real income raises aggregate demand for home output.A fall in domestic real income lowers aggregate demand for home output.The Equation of Aggregate Demand15Figure 16-1:Aggregate Demand as a Function of OutputOutput(real income),YAg

12、gregatedemand,DAggregate demand function,D(EP*/P,Y T,I,G)45The Equation of Aggregate Demand16Figure 16-2:The Determination of Output in the Short Run Output,YAggregatedemand,D45Aggregate demand=aggregate output,D=YAggregate demand2Y2D11Y13Y3How Output Is Determined in the Short Run18Output,the Excha

13、nge Rate,and Output Market EquilibriumWith fixed price levels at home and abroad,a rise in the nominal exchange rate makes foreign goods and services more expensive relative to domestic goods and services.Any rise in q will cause an upward shift in the aggregate demand function and an expansion of o

14、utput.Any fall in q will cause output to contract.Output Market Equilibrium in the Short Run:The DD Schedule19Output Market Equilibrium in the Short Run:The DD Schedule Figure 16-3:Output Effect of a Currency Depreciation with Fixed Output Prices Output,YAggregatedemand,D45D=Y1Y1Aggregate demand(E2)

15、Aggregate demand(E1)Y22Currencydepreciates20Deriving the DD ScheduleDD schedule It shows all combinations of output and the exchange rate for which the output market is in short-run equilibrium(aggregate demand=aggregate output).It slopes upward because a rise in the exchange rate causes output to r

16、ise.Output Market Equilibrium in the Short Run:The DD Schedule21Y2DDOutput Market Equilibrium in the Short Run:The DD ScheduleFigure 16-4:Deriving the DD ScheduleOutput,Y Aggregate demand,DD=YY1Aggregate demand(E2)Aggregate demand(E1)Y2Output,Y Exchange rate,EY11E1E2222Y2Output Market Equilibrium in

17、 the Short Run:The DD ScheduleFigure 16-5:Government Demand and the Position of the DD ScheduleD=Y Y1D(E0P*/P,Y T,I,G2)D(E0P*/P,Y T,I,G1)Y2Output,Y Exchange rate,EY1Aggregate demand curves2Government spending risesOutput,Y Aggregate demand,DDD1E01DD224AA ScheduleIt shows all combinations of exchange

18、 rate and output that are consistent with equilibrium in the domestic money market and the foreign exchange market.Asset Market Equilibrium in the Short Run:The AA Schedule25Output,the Exchange Rate,and Asset Market EquilibriumWe will combine the interest parity condition with the money market to de

19、rive the asset market equilibrium in the short-run.The interest parity condition describing foreign exchange market equilibrium is:R=R*+(Ee E)/Ewhere:Ee is the expected future exchange rateR is the interest rate on domestic currency depositsR*is the interest rate on foreign currency depositsAsset Ma

20、rket Equilibrium in the Short Run:The AA Schedule26Asset Market Equilibrium in the Short Run:The AA ScheduleFigure 16-6:Output and the Exchange Rate in Asset Market EquilibriumDomestic-currency return on foreign-currency depositsForeignexchangemarketMoneymarket E22R2 E11R1Real moneysupplyMS P1L(R,Y2

21、)L(R,Y1)Real domestic money holdingsDomestic interestrate,RExchange Rate,E02Output rises28For asset markets to remain in equilibrium:A rise in domestic output must be accompanied by an appreciation of the domestic currency.A fall in domestic output must be accompanied by a depreciation of the domest

22、ic currency.Asset Market Equilibrium in the Short Run:The AA Schedule29Figure 16-7:The AA Schedule Output,Y Exchange Rate,EAsset Market Equilibrium in the Short Run:The AA ScheduleAAY1E11Y2E2231Factors that Shift the AA ScheduleDomestic money supplyDomestic price levelExpected future exchange rateFo

23、reign interest rateShifts in the aggregate real money demand scheduleAsset Market Equilibrium in the Short Run:The AA Schedule32Short-Run Equilibrium for an Open Economy:Putting the DD and AA Schedules TogetherA short-run equilibrium for the economy as a whole must bring equilibrium simultaneously i

24、n the output and asset markets.That is,it must lie on both DD and AA schedules.33Figure 16-8:Short-Run Equilibrium:The Intersection of DD and AA Output,Y Exchange Rate,EAAY1E11Short-Run Equilibrium for an Open Economy:Putting the DD and AA Schedules TogetherDD34Figure 16-9:How the Economy Reaches It

25、s Short-Run EquilibriumAAY1E11Short-Run Equilibrium for an Open Economy:Putting the DD and AA Schedules TogetherDD3E32E2 Output,Y Exchange Rate,E35Temporary Changes in Monetary and Fiscal PolicyTwo types of government policy:Monetary policyIt works through changes in the money supply.Fiscal policyIt

26、 works through changes in government spending or taxes.Temporary policy shifts are those that the public expects to be reversed in the near future and do not affect the long-run expected exchange rate.Assume that policy shifts do not influence the foreign interest rate and the foreign price level.36

27、Monetary PolicyAn increase in money supply(i.e.,expansionary monetary policy)raises the economys output.The increase in money supply creates an excess supply of money,which lowers the home interest rate.As a result,the domestic currency must depreciate(i.e.,home products become cheaper relative to f

28、oreign products)and aggregate demand increases.Temporary Changes in Monetary and Fiscal Policy37DDFigure 16-10:Effects of a Temporary Increase in the Money Supply Output,Y Exchange Rate,EAA2Y2E22AA11E1Y1Temporary Changes in Monetary and Fiscal Policy38Fiscal PolicyAn increase in government spending,

29、a cut in taxes,or some combination of the two(i.e,expansionary fiscal policy)raises output.The increase in output raises the transactions demand for real money holdings,which in turn increases the home interest rate.As a result,the domestic currency must appreciate.Temporary Changes in Monetary and

30、Fiscal Policy39DD1Figure 16-11:Effects of a Temporary Fiscal Expansion Output,Y Exchange Rate,EAADD2Y1E112Y2E2Temporary Changes in Monetary and Fiscal Policy40Policies to Maintain Full EmploymentTemporary disturbances that lead to recession can be offset through expansionary monetary or fiscal polic

31、ies.Temporary disturbances that lead to overemployment can be offset through contractionary monetary or fiscal policies.Temporary Changes in Monetary and Fiscal Policy41Figure 16-12:Maintaining Full Employment After a Temporary Fall in World Demand for Domestic Products Output,Y Exchange Rate,EDD1AA

32、2AA1YfY2E22DD21E13E3Temporary Changes in Monetary and Fiscal Policy42DD1Figure 16-13:Policies to Maintain Full Employment After a Money-Demand Increase Output,Y Exchange Rate,EDD2AA1AA2YfY2E223E31E1Temporary Changes in Monetary and Fiscal Policy43Inflation Bias and Other Problems of Policy Formulati

33、onProblems of policy formulation:Inflation biasHigh inflation with no average gain in output that results from governments policies to prevent recessionIdentifying the sources of economic changesIdentifying the durations of economic changesThe impact of fiscal policy on the government budgetTime lag

34、s in implementing policies44Permanent Shifts in Monetary and Fiscal PolicyA permanent policy shift affects not only the current value of the governments policy instrument but also the long-run exchange rate.This affects expectations about future exchange rates.A Permanent Increase in the Money Suppl

35、yA permanent increase in the money supply causes the expected future exchange rate to rise proportionally.As a result,the upward shift in the AA schedule is greater than that caused by an equal,but transitory,increase(compare point 2 with point 3 in Figure 16-14).45DD1 Figure 16-14:Short-Run Effects

36、 of a Permanent Increase in the Money Supply Output,Y Exchange Rate,EAA2Y2E22AA11E1Yf3Permanent Shifts in Monetary and Fiscal Policy46Adjustment to a Permanent Increase in the Money SupplyThe permanent increase in the money supply raises output above its full-employment level.As a result,the price l

37、evel increases to bring the economy back to full employment.Figure 16-15 shows the adjustment back to full employment.Permanent Shifts in Monetary and Fiscal Policy47DD2 Figure 16-15:Long-Run Adjustment to a Permanent Increase in the Money Supply Output,Y Exchange Rate,EDD1AA2AA3Yf3E3AA1Y2E22E11Perm

38、anent Shifts in Monetary and Fiscal Policy48A Permanent Fiscal ExpansionA permanent fiscal expansion changes the long-run expected exchange rate.If the economy starts at long-run equilibrium,a permanent change in fiscal policy has no effect on output.It causes an immediate and permanent exchange rat

39、e jump that offsets exactly the fiscal policys direct effect on aggregate demand.Permanent Shifts in Monetary and Fiscal Policy49DD1Figure 16-16:Effects of a Permanent Fiscal Expansion Changing the Capital Stock Output,Y Exchange Rate,EDD2AA1AA2Yf2E21E1Permanent Shifts in Monetary and Fiscal Policy3

40、50Macroeconomic Policies and the Current AccountXX scheduleIt shows combinations of the exchange rate and output at which the CA balance would be equal to some desired level.It slopes upward because a rise in output encourages spending on imports and thus worsens the current account(if it is not acc

41、ompanied by a currency depreciation).It is flatter than DD.51Monetary expansion causes the CA balance to increase in the short run(point 2 in Figure 16-17).Expansionary fiscal policy reduces the CA balance.If it is temporary,the DD schedule shifts to the right(point 3 in Figure 16-17).If it is perma

42、nent,both AA and DD schedules shift(point 4 in Figure 16-17).Macroeconomic Policies and the Current Account52Figure 16-17:How Macroeconomic Policies Affect the Current Account Output,Y Exchange Rate,EAAYfE11DDXX432Macroeconomic Policies and the Current Account53The J-CurveIf imports and exports adju

43、st gradually to real exchange rate changes,the CA may follow a J-curve pattern after a real currency depreciation,first worsening and then improving.Currency depreciation may have a contractionary initial effect on output,and exchange rate overshooting will be amplified.It describes the time lag wit

44、h which a real currency depreciation improves the CA.Gradual Trade Flow Adjustment and Current Account Dynamics542Figure 16-18:The J-CurveTimeCurrent account(in domestic output units)13Long-runeffect of real depreciationon the currentaccountReal depreciation takes place and J-curve beginsEnd of J-cu

45、rveGradual Trade Flow Adjustment and Current Account Dynamics55Exchange Rate Pass-Through and InflationThe CA in the DD-AA model has assumed that nominal exchange rate changes cause proportional changes in the real exchange rates in the short run.Degree of Pass-throughIt is the percentage by which i

46、mport prices rise when the home currency depreciates by 1%.In the DD-AA model,the degree of pass-through is 1.Exchange rate pass-through can be incomplete because of international market segmentation.Currency movements have less-than-proportional effects on the relative prices determining trade volu

47、mes.Gradual Trade Flow Adjustment and Current Account Dynamics56SummaryThe aggregate demand for an open economys output consists of four components:consumption demand,investment demand,government demand,and the current account.Output is determined in the short run by the equality of aggregate demand

48、 and aggregate supply.The economys short-run equilibrium occurs at the exchange rate and output level.57SummaryA temporary increase in the money supply causes a depreciation of the currency and a rise in output.Permanent shifts in the money supply cause sharper exchange rate movements and therefore

49、have stronger short-run effects on output than transitory shifts.If exports and imports adjust gradually to real exchange rate changes,the current account may follow a J-curve pattern after a real currency depreciation,first worsening and then improving.58Figure 16AI-1:Short-Run Equilibrium in the I

50、S-LM Model Output,Y Interest rate,RY1R11Appendix I:The IS-LM Model and the DD-AA ModelLMIS59R2 Figure 16AI-2:Effects of Permanent and Temporary Increases in the Money Supply in the IS-LM Model Appendix I:The IS-LM Model and the DD-AA ModelR3LM2Output,Y Interest rate,RLM1Y33Y22Y11R13E31E1E22Exchange