MoneyandExchangeRate(国际金融香港大学,WONGKaFu).pptxVIP

Money and Exchange RateWONG Ka Fu2 February 2000Moneyas a medium of exchangeeliminates enormous search costs connected with a barter systemas a unit of accounttranslates different countries’ money prices into comparable termsas a store of valuetransfer purchasing power from the present into the futureMoney supplymany definitions of money supplyM1, M2, M3, etc.these definitions include assets that perform the functions of money at different degreesM1: the total amount of currency and checking deposits held by households and firmsMoney demanded by individuals depends on the expected return money relative to the returns offered by other assetsthe riskiness of money’s expected returninflationmoney’s liquiditya rise in the average value of transactions carried out by a household or firm causes its demand for liquidity and hence moneyAggregate money demandNominal demand: Md = P ? L ( R, Y )P = price levelR = interest rate ( of assets )Y = Real national incomeReal demand: Md / P = L ( R, Y )L(R,Y) rises when R fallsRAggregate real money demandL(R,Y)Real money holdingsL(R,Y) rises when Y increasesRAggregate real money demandY2 Y1L(R,Y2)L(R,Y1)Real money holdingsDetermination of the equilibrium interest ratereal money supplyRR*L(R,Y)Ms / PReal money holdingsEffect of an increase in money supply on the interest rateRR1R2L(R,Y)M1/PM2/PReal money holdingsEffect of an increase in real income on the interest rate RR2R1L(R,Y2)L(R,Y1)Ms/PReal money holdingsDetermination of exchange ratehome money market equilibrium determines home interest ratehome interest rate = rate of return on home depositinterest parity determines exchange rate conditional on foreign monetary policy and expected return on foreign depositHD/FDexchange rateReturn on home depositRelationship between Exchange rate and money supply1’EH/F1Expected return on foreign depositRate of return(in home currency)0L(RH,YH)(MsH/PH)11Real money holdingsHD/FDexchange rateReturn on home deposit2’EH/F2Effect of an increase i