Exchange rate lecture notes pdf
LECTURE NOTES CONTENTS PART I: Exchange Rates Chapter I: Foreign Exchange Markets I. Introduction to the Foreign Exchange Market 1.A An Exchange Rate is Just a Price 1.A.1 Equilibrium Exchange Rates and Foreign Exchange Risk II. Currency Markets 2.A Organization 2.A.1 Settlement of transactions 2.A.2 Activities Nominal effective exchange rate: is a weighted average of several bilateral exchange rates, usually using trade shares as weights to reflect the relative importance of each of the bilateral pairs involved. Example: suppose that: ∆E $/pound = - 10%(appreciates 10%), and trade share of UK in US trade is 40% ∆E De–nitions: Nominal Exchange Rate (NER) Nominal Exchange Rate is the price of a foreign currency in terms of the home currency E $/e = 1.3467=US exchange rate (in US terms, Dollars per Euro) Ee/$ = 0.7425=Euro exchange rate (in European terms, Euros per Dollar) Thus, E $/e = 1/Ee/$ An increase in E $/e means a dollar depreciation. LECTURE NOTES Chapter 14: Exchange Rates and International Monetary System 1. The U.S. Balance of Payments Accounts Balance of payment accounts: records economic transactions between the U.S. and foreign residents in both goods and assets o Credits: all earnings from the foreign activities of U.S. residents and the U.S. government rate of the lowest 3 inflation countries in the EU – Interest rates: the long‐term rate should be no more than 2% above the average of the 3 countries with the lowest inflation – Budget deficit: no more than 3% of GDP – National dbdeb t: no more than 60% of GDP – Exchange rates: currency within the normal bands of the As the figure titled "Fixed Exchange Rate Regime" illustrates, the true market exchange rate is at e M but the Polish government wishes to peg the currency at the lower exchange rate e P. For example, the market exchange rate may be 5 (5 zlotys to the U.S. dollar) but the Polish government pegs the exchange rate at 4 (4 zlotys to the U.S. dollar). Spot Rates and Forward Rates. • Spot rates are exchange rates for currency exchanges “on the spot”, or when trading is executed in the present. • Forward rates are exchange rates for currency exchanges that will occur at a future (“forward”) date. ♦forward dates are typically 30, 90, 180 or 360 days in the future.
7 Exchange Rates, Interest Rates and Expectations. 175 This is a collection of lecture notes that I have used over a number of years teaching Advanced at http://eml.berkeley.edu/ dromer/papers/ISMP%20Text%20Graphs%202013.pdf. 4
De–nitions: Nominal Exchange Rate (NER) Nominal Exchange Rate is the price of a foreign currency in terms of the home currency E $/e = 1.3467=US exchange rate (in US terms, Dollars per Euro) Ee/$ = 0.7425=Euro exchange rate (in European terms, Euros per Dollar) Thus, E $/e = 1/Ee/$ An increase in E $/e means a dollar depreciation. LECTURE NOTES Chapter 14: Exchange Rates and International Monetary System 1. The U.S. Balance of Payments Accounts Balance of payment accounts: records economic transactions between the U.S. and foreign residents in both goods and assets o Credits: all earnings from the foreign activities of U.S. residents and the U.S. government rate of the lowest 3 inflation countries in the EU – Interest rates: the long‐term rate should be no more than 2% above the average of the 3 countries with the lowest inflation – Budget deficit: no more than 3% of GDP – National dbdeb t: no more than 60% of GDP – Exchange rates: currency within the normal bands of the As the figure titled "Fixed Exchange Rate Regime" illustrates, the true market exchange rate is at e M but the Polish government wishes to peg the currency at the lower exchange rate e P. For example, the market exchange rate may be 5 (5 zlotys to the U.S. dollar) but the Polish government pegs the exchange rate at 4 (4 zlotys to the U.S. dollar).
As the figure titled "Fixed Exchange Rate Regime" illustrates, the true market exchange rate is at e M but the Polish government wishes to peg the currency at the lower exchange rate e P. For example, the market exchange rate may be 5 (5 zlotys to the U.S. dollar) but the Polish government pegs the exchange rate at 4 (4 zlotys to the U.S. dollar).
Lecture 3: Foreign Exchange Determination and. Forecasting The foreign exchange rate is the price of a foreign currency. • As any other price, it is determined
rate of the lowest 3 inflation countries in the EU – Interest rates: the long‐term rate should be no more than 2% above the average of the 3 countries with the lowest inflation – Budget deficit: no more than 3% of GDP – National dbdeb t: no more than 60% of GDP – Exchange rates: currency within the normal bands of the
should the exchange rate of a currency be kept at a fixed level? can one decrease unemployment, if one accepts an increase in inflation? A survey of world LECTURE NOTES CONTENTS PART I: Exchange Rates Chapter I: Foreign Exchange Markets I. Introduction to the Foreign Exchange Market 1.A An Exchange Rate is Just a Price 1.A.1 Equilibrium Exchange Rates and Foreign Exchange Risk II. Currency Markets 2.A Organization 2.A.1 Settlement of transactions 2.A.2 Activities Nominal effective exchange rate: is a weighted average of several bilateral exchange rates, usually using trade shares as weights to reflect the relative importance of each of the bilateral pairs involved. Example: suppose that: ∆E $/pound = - 10%(appreciates 10%), and trade share of UK in US trade is 40% ∆E De–nitions: Nominal Exchange Rate (NER) Nominal Exchange Rate is the price of a foreign currency in terms of the home currency E $/e = 1.3467=US exchange rate (in US terms, Dollars per Euro) Ee/$ = 0.7425=Euro exchange rate (in European terms, Euros per Dollar) Thus, E $/e = 1/Ee/$ An increase in E $/e means a dollar depreciation. LECTURE NOTES Chapter 14: Exchange Rates and International Monetary System 1. The U.S. Balance of Payments Accounts Balance of payment accounts: records economic transactions between the U.S. and foreign residents in both goods and assets o Credits: all earnings from the foreign activities of U.S. residents and the U.S. government rate of the lowest 3 inflation countries in the EU – Interest rates: the long‐term rate should be no more than 2% above the average of the 3 countries with the lowest inflation – Budget deficit: no more than 3% of GDP – National dbdeb t: no more than 60% of GDP – Exchange rates: currency within the normal bands of the As the figure titled "Fixed Exchange Rate Regime" illustrates, the true market exchange rate is at e M but the Polish government wishes to peg the currency at the lower exchange rate e P. For example, the market exchange rate may be 5 (5 zlotys to the U.S. dollar) but the Polish government pegs the exchange rate at 4 (4 zlotys to the U.S. dollar).
INTERMEDIATE MACROECONOMICS. Page 1 of 14. LECTURE NOTES. Chapter 14: Exchange Rates and International Monetary System. 1. The U.S. Balance
4 LECTURE NOTES 1. INTRODUCTION a matter of understanding, forecasting, or policy guidance. Just as you would not choose a scale model of a city to serve the purposes of a street map, you would not choose a scale model of an economy to guide your understanding of exchange rate determination. Good 8 lecture notes on international finance Definition (ERPT). The exchange rate pass-through (ERPT) is a measure of how responsive international prices are to changes in exchange rates. ERPT is estimated using the following dynamic lags regression: Dpin,t = ain + T å k=0 b in,kDe in,t k +ginXin,t +ein,t where Xin,t is a vector of controls. Setting T = 0 measures the short-run For example, if we assume for the moment that the dollar is the domestic currency, the exchange rate between the dollar ($) and the British pound sterling ( £ ) is E=$/£ (12.6) One complication is that the definition of the exchange rate is ambiguous, depending on the reference of location. 10 Market Institutions and Exchange Rates 1.2 The Markets for Foreign Exchange The foreign exchange, or forex (FX) market is the market where ex-change rates are determined. An exchange rate is a price, speci–cally the price of one currency in terms of another. It is the mechanism by which world currencies are tied together in the global
4 LECTURE NOTES 1. INTRODUCTION a matter of understanding, forecasting, or policy guidance. Just as you would not choose a scale model of a city to serve the purposes of a street map, you would not choose a scale model of an economy to guide your understanding of exchange rate determination. Good 8 lecture notes on international finance Definition (ERPT). The exchange rate pass-through (ERPT) is a measure of how responsive international prices are to changes in exchange rates. ERPT is estimated using the following dynamic lags regression: Dpin,t = ain + T å k=0 b in,kDe in,t k +ginXin,t +ein,t where Xin,t is a vector of controls. Setting T = 0 measures the short-run For example, if we assume for the moment that the dollar is the domestic currency, the exchange rate between the dollar ($) and the British pound sterling ( £ ) is E=$/£ (12.6) One complication is that the definition of the exchange rate is ambiguous, depending on the reference of location. 10 Market Institutions and Exchange Rates 1.2 The Markets for Foreign Exchange The foreign exchange, or forex (FX) market is the market where ex-change rates are determined. An exchange rate is a price, speci–cally the price of one currency in terms of another. It is the mechanism by which world currencies are tied together in the global Under the floating exchange rate system, an increase in the demand for a currency will lead to a rise in the exchange rate (i.e. an appreciation of the currency). In the above diagram, an increase in the demand for a currency (D DC) from D DC0 to D DC1 leads to a rise in the exchange rate (E)