Lecture 4_ECO3IME

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1、PreviewLecture4•LawofonepricePriceLevels•Purchasingpowerparityandthe•LongrunmodelofexchangeratesExchangeRate¨MonetaryApproachintheLongRun•Relationshipbetweeninterestratesandinflation:¨FisherEffect•Shortcomingsofpurchasingpowerparity•Longrunmodelofexchangerates:¨RealExchangeRateApproachECO

2、3IME•RealinterestratesInternationalMonetaryEconomics15-2TheBehaviorofExchangeRatesLawofOnePrice•Whatmodelscanpredicthowexchangeratesbehave?•Thelawofonepricesimplysaysthat¨Inlastchapterwedevelopedashortrunmodelandalongrunmodelthatusedmovementsinthemoneysupply.thesamegoodindifferentcompetit

3、ive¨Inthischapter,wedevelop2moremodels,buildingonthelongrunapproachfromlastchapter.marketsmustsellforthesameprice,¨Longrunmeansasufficientamountoftimeforpricesofallgoodsandservicestoadjusttomarketconditionssothattheirmarketsandwhentransportationcostsandbarriersthemoneymarketareinequilibri

4、um.betweenthosemarketsarenot¨Becausepricesareallowedtochange,theywillinfluenceinterestratesandexchangeratesinthelongrunmodels.important.¨Thelongrunmodelsarenotintendedtobecompletelyrealisticdescriptionsabouthowexchangeratesbehave,butwaysofrepresentinghowmarketparticipantsmayformexpectatio

5、nsaboutfutureexchangeratesandhowexchangeratestendtomoveoverlongperiods.15-315-4LawofOnePrice(cont.)PurchasingPowerParity•Example:Thepriceofthesamepizza(using•Purchasingpowerparityistheapplicationofacommoncurrencytomeasuretheprice)inthetwocities(SeattleandVancouver)mustthelawofonepriceacro

6、sscountriesforallbethesameifmarketsarecompetitiveandgoodsandservices,orforrepresentativetransportationcostsandbarriersbetweengroups(“baskets”)ofgoodsandservices.marketsarenotimportant.Ppizza=(E)x(Ppizza)PUS=(EUS$/C$)x(PCanada)USUS$/C$CanadaPUS=levelofaveragepricesintheUSPpizza=priceofpizz

7、ainSeattleUSPpizza=priceofpizzainVancouverPCanada=levelofaveragepricesinCanadaCanadaE=USdollar/CanadiandollarexchangerateEUS$/C$=USdollar/CanadiandollarexchangerateUS$/C$15-515-61PurchasingPowerParity(cont.)PurchasingPowerParity(cont.)•Purchasingpowerparitycomesin2f