Professional Documents
Culture Documents
Alan Shapiro
7th Edition
J.Wiley & Sons
Power Points by Joseph F. Greco, Ph.D. California State University, Fullerton
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CHAPTER 2
THE DETERMINATION OF EXCHANGE RATES
CHAPTER 2 OVERVIEW:
I. EQUILIBRIUM EXCHANGE RATES II. ROLE OF CENTRAL BANKS III. EXPECTATIONS AND THE ASSET MARKET MODEL
e0 e1 e1
where e0 = old currency value e1 = new currency value
Note: Resulting sign is always negative
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e1 e0 e0
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e1 e0 e0
= (.68 - .64)/ .64 = 6.25%
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PART II.
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A. Current events
B. C. D. Current supply Demand flows Expectation of future exchange rate
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EXPECTATIONS
II. Role of Expectations : A. Currency = financial asset B. Exchange rate = simple relation of two financial assets
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EXPECTATIONS
III. Demand for Money and Currency Values: Asset Market Model A. Exchange rates reflect the
EXPECTATIONS
B. Soundness of a Nations Economic Policies
- a nations currency tends to strengthen with sound economic policies.
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EXPECTATIONS
IV. EXPECTATIONS AND
CENTRAL BANK BEHAVIOR
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EXPECTATIONS
A. Central Bank Reputations B. Central Bank Independence
C. Currency Boards
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