北大金融学课件(英文版)第5章(4课时).ppt

CHAPTER 5 What Determines Exchange Rates? The Variability of Exchange Rate Three types of variability after early 1970s. Long-term trends Medium-term trends (which can be counter to the long-term trends) Short-term trends Figure 5.1, Panel A Figure 5.1, Panel B In the Short Run: the Asset Market Approach Most of the daily exchange trading is related to the tradings of international financial investors. The tradings of international financial investors in assets market will place pressures on demand and supply. In the Short Run : the Asset Market Approach The uncovered interest parity: recalling from Chapter 4, the value of a foreign currency will go up when there is A rise in the foreign interest rate (if) relative to domestic interest rate; A rise in the expected future spot exchange rate (eex ); Figure 5.2 In the Long Run: Purchasing Power Parity The law of one price : P = Pf ?e At a point of time in a perfectly efficient global market, a easily traded product should have the same price everywhere. The law of one price works well for heavily traded commodities. In the Long Run: Purchasing Power Parity The absolute PPP: e = P/Pf Where, P: a basket of products measured in domestic currency Pf : a basket of products measured in foreign currency e: domestic currency/foreign currency Absolute PPP: Evidence BMI : Big Mac Index as of the end of 2000 In the Long Run: Purchasing Power Parity All the goods are tradable? Free trade among nations? International transport costs are negligible? Commodity markets are perfectly efficient? The absolute PPP does not hold very closely in the real world at a point in time. Evidence shows large divergences do tend to shrink over time for traded goods. In the Long run: Purchasing Power Parity ·??? Changes over time (relative PPP): ? From time 0 to time t: ? Pt Pf,t . et P0 Pf,0 e0 Purchasing Power Parity --or-- ? et Pt Pf,t e0 P0 Pf,0 ? -