国经CH14.ppt

Exchange Rate Forecasts Using the Simple Model Assumptions Both countries Constant money growth rate m, fixed level of output Y Foreign Money growth m is zero, inflation p is zero Home Money growth m is positive, inflation p is positive Consider two cases: Case 1: Home implements a one-time x% increase in M. Case 2: Home increases its rate of money growth m by Dm What happens to these variables according to the monetary approach? Monetary Regimes and Exchange Rate Regimes Policy makers are concerned with costs of inflation Inflation is unpopular and may have macroeconomic costs These costs are severe when inflation rates are high. This is why inflation targets are desirable. The monetary approach illustrates how policymakers can choose among different nominal anchors to control inflation rate Monetary regime: what are the rules, objectives, policies followed by the central banks Exchange rate regime: part of the monetary regime; is the exchange rate fixed or floating? The Long Run: The Nominal Anchor Exchange rate target In practice, this corresponds to fixed exchange rates, but also to pegs and managed float regimes. Tradeoffs Pro: Simple and transparent Con: possibility of “imported inflation” from other country With a fixed exchange rate, relative PPP means the home country inflation equals the foreign country inflation rate. Choice of which country to peg to is crucial The Long Run: The Nominal Anchor Money supply target Tradeoffs Pro: Simple. There is little decision-making for central bankers. Con: can achieve target rate of inflation only if real income growth is known Example: M growth 4%, Y growth 2% means inflation of 2% What if Y growth is 1%? 3%? Problem: nobody knows future real income growth, not even central bankers. The Long Run: The Nominal Anchor Inflation target plus interest rate policy Tradeoffs Pro: Flexibility for central bankers. In short run central bank has the freedom to let nominal interest fluctuate, but in long run promise