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1、9-1,CHAPTER 9,Internal and External Balance with Fixed Exchange Rates,9-2,Fixed Rate and Macro Economy,Divergences between the IS-LM intersection and the FE curve call for official intervention Official intervention causes OR transactions The official settlements balance is not zero Creates pressure
2、s for internal adjustments.,9-3,Official Intervention,Intervention vs. monetary policy Intervention changes Ms, and tends to reduce the imbalance Intervention limits the independence of monetary policy,9-4,External vs. Internal Balance,Pursue external balance, letting inflation or unemployment get o
3、ut of control? Focus on internal balance while allowing deficit or surplus widened? Two possible solutions,9-5,How intervention influences Ms?,9-6,How intervention influences Ms?,When there is a deficit and government intervenes to sell foreign currencies,9-7,How intervention influences Ms?,When the
4、re is a surplus and government intervenes to buy foreign currencies,9-8,Figure 9.2,9-9,Figure 9.3,surplus,deficit,9-10,Figure 9.3,surplus,deficit,LM1,B,9-11,Is Intervention Favorable?,External imbalance official intervention Ms changes the economy moves back to external balance. This adjustment may
5、be undesirable, as Independence of monetary policy is harmed The adjustment may conflict with domestic goals.,9-12,Sterilization,Sterilization can be used to offset the changes in Ms, but it has its limit.,Balance Sheet of Central Bank,Selected Assets Selected Liabilities,Domestic Assets (D) + Monet
6、ary base (MB) + Debt securities Currency Loans to banks Deposits from banks International reserve assets (R) Foreign-currency assets,9-13,Independent Monetary Policy with Fixed Rates ?,If a country begins with a deficit, the defense of the fixed rate forces it to contract its Ms If it begins with a
7、surplus, the defense forces it to expand its Ms Even if the country begins with a payments balance, its ability to pursue an independent monetary policy is constrained.,9-14,Independent Monetary Policy with Fixed Rates ?,Expansionary monetary policy shifts LM down The balance of payments turns into
8、deficit Official intervention increases Ms LM shifts back,IS,i,90,100,0.07,0.05,A,B,9-15,Independent Monetary Policy with Fixed Rates ?,A fixed exchange rate and its defense constrain a countrys ability to pursue an independent monetary policy.,9-16,The Impossible Trinity,A nation cant have simultan
9、eously : Free capital mobility Independent monetary policy Fixed exchange rate A nation must choose one side of this triangle and give up the opposite corner.,9-17,Fiscal Policy with Fixed Rates,Fiscal policy: government spending and tax-cut An expansionary fiscal policy Increases domestic i and Y m
10、ay “improve” payments balance at first worsens it eventually,9-18,Figure 9.5,9-19,Fiscal Policy with Fixed Rates,Responsive capital flows Payments surplus Government intervention to increase Ms Strengthens the policy effect : i declined and Y raised further Unresponsive capital flows Payments deficit Government intervention to reduce Ms i raised and Y declined,9-20,Figure 9.6,9-21,9-22,
