lecture 3 theory of balance of payments 国际金融教材.pptVIP

Chinese Finance Research Institute I. A Simple Model I.1 Stable Monetary Demand By the quantity theory of money, money demand is a function of national income. Md=kPY Where, Md denotes real demand for money, and P for price. Y stands for national income. The money demand function forms the basis of the aggregate demand schedule which is illustrated in the Figure 1-2-3. Monetary Approach Figure 1-2-3 Aggregate demand schedule P Y AD1 AD2 P2 Y2 P1 Y1 I.2 Vertical Aggregate Supply Schedule “The simple monetary model assumes that the labor market is sufficiently flexible that the economy is continuously at a full employment level of output (Pilbeam, 2006).” See also Figure 1-2-4. I.3 Purchasing Power Parity (PPP) For the time being, we simply state that the exchange rate adjusts so quickly that the following equation hold continuously. We will turn to the theory again later. See Figure 1-2-5. P=SP* Monetary Approach Figure 1-2-4 Aggregate supply schedule Y P AS1 AS2 Y1 Y2 Figure 1-2-5 PPP schedule P Overvaluation Undervaluation S Monetary Approach I.4 Money Supply Ms=D+R Where Ms is the home money base, D is home bond holdings of the monetary authorities, and R is the official reserves. See Figure 1-2-6. Open Market Operation (OMO) Foreign Exchange Operation (FXO) The money supply equation can also be written in the first difference form, ?Ms=?D+?R Figure 1-2-6 PPP schedule Ms R 45° D1 D2 Ms1 Ms2 * * Contents Elasticity Approach Absorption Approach Monetary Approach An overall Comments Assignments The Elasticity Approach, pioneered by Marshall (1923) and Lerner (1944) and later extended by Robinson (1937) and Machlup (1939), focuses on the effect of exchange rate changes upon a country’s current account balance. I. How Does the Exchange Rate Matter? Changes of the exchange rate will have an impact upon a country’s export supplies and demands, basically through changes of relative prices between domestic products and forei