ch09The Monetary Approach to BalanceofPayments and ExchangeRate Determination(广东商学院 王强)概要1.ppt

Daniels and VanHoose Monetary Approach The Monetary Approach to Balance-of-Payments and Exchange-Rate Determination Introduction The Monetary Approach focuses on the supply and demand of money and the money supply process. The monetary approach hypothesizes that BOP and exchange-rate movements result from changes in money supply and demand. Small Country Example A small country is modeled as: (1) Md = kPy (2) M = m(DC + FER) (3) P = SP* and, in equilibrium, (4) Md = M. Small Country Model The balance of payments is defined as: (5) CA + KA = FER. For example, if FER 0, then CA + KA 0, and the nation is running a balance of payments deficit. Small Country Model (4) and (3) into (1) yields, M = kP*Sy. Sub in (2), (6) m(DC + FER) = kP*Sy. Small Country Model Fixed Exchange Rate Regime Under fixed exchange rates, the spot rate, S, is not allowed to vary. FER must vary to maintain the parity value of the spot rate. Hence, the BOP must adjust to any monetary disequilibrium. Small Country Model Consider what happens if the central bank raises DC. Money supply exceeds money demand. m(DC? + FER) kP*Sy There is pressure for the domestic currency to depreciate. The central bank must sell FER until M = Md. m(DC? + FER?) = KP*Sy Small Country Model There has been no net impact on the monetary base and money supply as the change in FER offset the change in DC. There results, however, a balance of payments deficit as ?FER 0. Small Country Example Flexible exchange rate regime: Under a flexible exchange rate regime, the FER component of the monetary base does not change. The spot exchange rate, S, will adjust to eliminate any monetary disequilibrium. Small Country Model Consider the impact of an increase in DC. Again money supply will exceed money demand m(DC? + FER) kP*Sy. Now the domestic currency must depreciate to balance money supply and money demand m(DC? + FER) = kP*S?y. Small Country Model The monetary approach postulates that changes in a