14--ch15价格水平与长期汇率水平.ppt

CH15. Price Levels the Exchange Rate in the Long Run (此部分在英文书P387--) Introduction The model of long-run exchange rate behavior provides the framework that actors in asset markets use to forecast future exchange rates. Predictions about long-run movements in exchange rates are important even in the short run. In the long run, national price levels play a key role in determining both interest rates and the relative prices at which countries’ products are traded. The theory of purchasing power parity (PPP) explains movements in the exchange rate between two countries’ currencies by changes in the countries’ price levels. The Law of One Price Law of one price Identical goods sold in different countries must sell for the same price when their prices are expressed in terms of the same currency. This law applies only in competitive markets free of transport costs and official barriers to trade. Example: If the dollar/pound exchange rate is $1.50 per pound, a sweater that sells for $45 in New York must sell for ￡30 in London. The Law of One Price It implies that the dollar price of good i is the same wherever it is sold: PiUS = (E$/€) x (PiE) where: PiUS is the dollar price of good i when sold in the U.S. PiE is the corresponding euro price in Europe E$/€ is the dollar/euro exchange rate The Law of One Price Suppose The Economist magazine sells for ￡2.50 in the UK and $3.95 in the US. Arbitrage, therefore, should guarantee that the exchange rate between the dollar and the pound be s = 3.95/2.50 = 1.580 ($/￡). In words, the dollar price of The Economist in the UK should equal the dollar price of the Economist in the US (ignoring transportation costs). Purchasing Power Parity Theory of Purchasing Power Parity (PPP) The exchange rate between two counties’ currencies equals the ratio of the counties’ price levels. It compares average prices across countries. It predicts a dollar/euro exchange rate of: E$/€ = PUS/PE (