moneyandexchangerate(国际金融-香港大学,wongkafu).pptVIP

Money and Exchange Rate WONG Ka Fu 2 February 2000 Money as a medium of exchange eliminates enormous search costs connected with a barter system as a unit of account translates different countries’ money prices into comparable terms as a store of value transfer purchasing power from the present into the future Money supply many definitions of money supply M1, M2, M3, etc. these definitions include assets that perform the functions of money at different degrees M1: the total amount of currency and checking deposits held by households and firms Money demanded by individuals depends on the expected return money relative to the returns offered by other assets the riskiness of money’s expected return inflation money’s liquidity a rise in the average value of transactions carried out by a household or firm causes its demand for liquidity and hence money Aggregate money demand Nominal demand: Md = P ? L ( R, Y ) P = price level R = interest rate ( of assets ) Y = Real national income Real demand: Md / P = L ( R, Y ) L(R,Y) rises when R falls L(R,Y) rises when Y increases Determination of the equilibrium interest rate Effect of an increase in money supply on the interest rate Effect of an increase in real income on the interest rate Determination of exchange rate home money market equilibrium determines home interest rate home interest rate = rate of return on home deposit interest parity determines exchange rate conditional on foreign monetary policy and expected return on foreign deposit Money and money prices Money market equilibrium: Ms / P = L ( R, Y ) I.e. P = Ms / L ( R, Y ) and 2P = 2Ms / L ( R, Y ), or generally kP = kMs / L ( R, Y ) Monetary Growth and Price-Level Change of G7 countries (1973-1998) Empirical evidence Long-run money supplies and price levels (Also see Krugman and Obstfeld: Figure 14-10) Roughly, money growth rates are positively correlated with inflation rate (I.e., price level changes) z % change in money supply is related