PPT-1 2 4 Exchange Rate Determination

Explain how exchange rate movements are measured Explain how the equilibrium exchange rate is determined Examine factors that determine the equilibrium exchange rate Explain the movement in cross exchange rates. Two polar cases. Fixed (pegged) exchange rates. CB buys or sells reserves to maintain a set price of foreign exchange. Flexible exchange rates. CB does not intervene in market for foreign exchange. and . 2. Exchange Rate Essentials. Exchange Rates in Practice. The Market for Foreign Exchange. Arbitrage and Spot Exchange . Rates. . Arbitrage . and . Interest Rates. Conclusions. © 2014 Worth Publishers . the Central Bank. Chapter 19. Exchange Rates are Volatile. Costs of Volatile Exchange Rates. Exchange rate volatility increases risk in international finance. . Ex. Many developing economy corporates issue securities in US$. An exchange rate devaluation will make this more expensive to repay. . OF EXCHANGE RATES. LECTURE 23 --. . . Building blocs. - Interest rate parity. - Money demand equation. - Goods markets. . Flexible-price . version: . monetarist/Lucas model. - . derivation. - applications: hyperinflation; speculative . Payments. Learning Objectives. How the exchange rate is determined. Trends and fluctuations in the exchange rate. The effects of alternative exchange rate policies. Causes of international deficits and surpluses. Sections. Exchange rate arrangements. Balance of payments. Exchange rate regime, before 1976. Desired exchange rate stability.. Currencies were largely anchored, either directly or indirectly, on gold.. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use. Table 14-1: Exchange Rate Quotations. Value of $1.00. Domestic and Foreign . C. urrencies. In these lectures, . domestic currency. refers to the US dollar. Foreign currency . refers to the Euro, or at times to the Yen or the Yuan. Building blocs. - Interest . rate parity. - Money demand equation. - Goods markets. . Flexible-price version: . monetarist/Lucas model. - derivation. . - hyperinflation . &. other applications. Fixed vs. Floating. The exchange rate fluctuates in a narrow range (or not at all) against a base currency over a sustained period of time. . Government action is needed to maintain the exchange rate.. Chapter 16 . International Economics. Udayan. Roy. Long Run and Short Run. Long run theories are useful when all prices of inputs and outputs have enough time to adjust fully to changes in supply and demand.. introduction. At the most basic level, exchange rates are determined by demand and supply of one currency relative to the demand and supply of another.. However differences in relative demand and supply explain the determination of exchange rates, they do it only in a superficial sense.. Annina Kaltenbrunner, Leeds University Business School, a.kaltenbrunner@leeds.ac.uk. Daniel Perez Ruiz, Leeds University Business School, bndapr@leeds.ac.uk. Anjelo Okot, Leeds University Business School and Central Bank of Uganda, bn15ao@leeds.ac.uk. IIP . Methods, Tools and Applications for Germany. Ulf von . Kalckreuth. , Principal Economist-Statistician, DG Statistics, Deutsche Bundesbank*. *The paper is joint work with Stephanus . Arz. and Stefan .