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1、International Monetary Theory and Policy, EC2020/3026 Week 12, Autumn 2003RevisionInternational MacroeconomicsSubject It is concerned with the full employment of scarceresources and the price stability throughout the world.Method of the analysis Open economy macroeconomic model. Building blocks.1. A
2、sset market (foreign exchange market and do-mestic money market).2. Output market. Equilibrium analysis. Individuals are content with their consumption leveland asset holdings. Firms are content with their production level. Short and long run equilibrium.Xavier Mateos-Planas and Akos Valentinyi 1Int
3、ernational Monetary Theory and Policy, EC2020/3026 Week 12, Autumn 2003Asset market Asset demand depends on1. Expected return,2. Risk,3. Liquidity. Demand depends only on expected return if the assetsare prefect substitutes from the point of view ofliquidity and riskiness.Foreign exchange market Exc
4、hange rate: relative price of national monies. Equilibrium condition: interest parity condition The expected returns on deposits of two currenciesmeasured in the same currency are equal.R = R +Ee/ E/E/orR = R + Ee EE Investors are indifferent between investing in euro oron sterling deposits.Xavier M
5、ateos-Planas and Akos Valentinyi 2International Monetary Theory and Policy, EC2020/3026 Week 12, Autumn 2003Domestic money market Demand of real moneyMdP = L(R, Y) Supply money: the amount of real money individualactually hold. EquilibriumMsP = L(R, Y)Actual money holding equals desired money holdin
6、g.Asset market equilibrium Equilibrium both on the foreign exchange market andthe domestic money market. Short run equilibrium: P and Ee are given. Long run equilibrium: P and Ee adjust. P adjust proportionally to the change in moneysupply (quantity theory of money). Ee adjust to reflect long run ch
7、anges in relativepurchasing power (relative PPP theory of exchangerate). Relative purchasing power is determined byrelative money supplies.Xavier Mateos-Planas and Akos Valentinyi 3International Monetary Theory and Policy, EC2020/3026 Week 12, Autumn 2003Short Run Asset Market Equilibrium0ERealmoney
8、 holdingsDomestic interestrate, RF or e ig ne xc ha ng em ar k etExpected domestic-currency returnon foreign-currency depositsR + Ee EEE1M on ey ma r ke tL(R,Y)M1PR1M2PR2Increase inmoney supplyE2Decrease in the returnon domestic depositsXavier Mateos-Planas and Akos Valentinyi 4International Monetar
9、y Theory and Policy, EC2020/3026 Week 12, Autumn 2003Output and Exchange Rate in Asset Market Equilibrium0Exchangerate, EDomestic realmoney holdingsDomestic interestrate, RF or e ig ne xc ha ng em ar k etExpected domestic-currency returnon foreign-currency depositsR + Ee EEE1E2M on ey ma r ke tL(R,Y
10、1)MPRealmoney supplyL(R,Y2)R1 R2Output risesExchange rate fallsXavier Mateos-Planas and Akos Valentinyi 5International Monetary Theory and Policy, EC2020/3026 Week 12, Autumn 2003AA schedule AA schedule: all exchange rate and output combi-nations for which the asset market is in short-runequilibrium
11、. P and P are fixed. An increase in output Currency appreciates (E falls). Negative relationship between E and Y.The AA ScheduleOutput, YExchangerate, EE1Y1E2Y2Xavier Mateos-Planas and Akos Valentinyi 6International Monetary Theory and Policy, EC2020/3026 Week 12, Autumn 2003Output market Aggregate
12、demand,DD = C(Y T+ ) + I + G + CAparenleftBiggEPP , Y TparenrightBigg+ D = DparenleftBiggEPP , Y T, I,GparenrightBiggAggregate demand is increasing in domestic real income, Real exchange rate.Output market equilibrium Equilibrium: equality of demand and supplyY = D(EP/P, Y T, I,G) Short run equilibr
13、ium Prices and exchange rate are given. Demand determines supply. Long run equilibrium Productive capacities determine supply. Prices and exchange rate adjust to ensure outputmarket equilibrium.Xavier Mateos-Planas and Akos Valentinyi 7International Monetary Theory and Policy, EC2020/3026 Week 12, A
14、utumn 2003DD Schedule DD schedule: all exchange rate and output combi-nations for which the output market is in short-runequilibrium. E increases (depreciation of the domestic currency) Foreign goods and services become more expensiverelative to the domestic one, Demand for domestic goods and servic
15、es increasesat each output level, Short run equilibrium output rises.The DD ScheduleOutput, YExchangerate, E DDY1 Y2E1E2Xavier Mateos-Planas and Akos Valentinyi 8International Monetary Theory and Policy, EC2020/3026 Week 12, Autumn 2003Equilibrium Simultaneous equilibrium in the asset market and theoutput market. Analysis How policies effect output, employment, price leveland exchange rate in the short run run. How po
