第15讲Price levels and Exchange Rate in the Long Run(国际金融(香港大学,WONG Ka Fu).ppt

Price levels and Exchange Rate in the Long Run WONG Ka Fu 7th February 2001 Basic math review X=A/B ? ln X = ln A - ln B Y=Y(x) ? d ln Y / dx = d lnY / dY ? dY / dx = (1/Y) (dY/dx) Basic math review P=P(t) ? d ln P / dt = d lnP / dP ? dP / dt =(1/P) (dP/dt) Take the change of t (dt) from s to s+1. ? d ln P / dt = [1/P(s)] [P(s+1) - P(s) /1] = [P(s+1) - P(s) ] / P(s) = percentage change in P at time s. Law of one price In a competitive markets free of 1. transportation costs and 2. official barriers to trade (such as tariffs), identical goods sold in different countries must sell for the same price when their prices are expressed in terms of the same currency. Law of one price implies exchange rate For any good i sold in both home and foreign countries PHi = (EH/F) ? (PFi) Hence, the implied exchange rate is EH/F = PHi / PFi Absolute Purchasing Power Parity (Absolute PPP) For a given reference commodity basket sold in both the home and the foreign countries PH = (EH/F) ? (PF) Hence, the implied exchange rate is EH/F = PH / PF The implied exchange rate from the Economist’s Big Mac index Relative PPP Prices and exchange rates change such that the ratio of each currency’s domestic and foreign purchasing powers are preserved. Hence, (EH/F,t - EH/F,t-1 )/ EH/F,t-1 = ?H,t - ?F,t where ?t = (Pt - Pt-1 ) / Pt-1 Relative PPP If absolute PPP does not hold because of frictions and other factors and we have EH/F = ? PH / PF where ? is a constant that measures the difference from absolute PPP. EH/F(t) = ? PH (t) / PF(t) ln EH/F (t)= ln ? + ln PH (t) - ln PF(t) Taking derivative with respect to t: dln EH/F (t)/dt = dln ? /dt + dln PH (t)/dt - dln PF(t)/dt Relative PPP Hence, (EH/F,t - EH/F,t-1 )/ EH/F,t-1 = ?H,t - ?F,t where ?t = (Pt - Pt-1 ) / Pt-1 percentage change in EH/F,t = percentage change in PH,t - percentage change in PF,t Long-run exchange rate based on absolute PPP EH/F = PH / PF PH = MHs / L ( RH, YH