Transcript Chapter 16 短期下的產出與匯率 Output and the Exchange rate in the Short Run

Chapter 16
Output and the Exchange rate
in the Short Run
短期下的產出與匯率
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Events：
In September 1992 Britain allowed the pound
sterling to depreciate in the foreign exchange
market. The country’s net exports surged as a
result, and Britain was lifted out of a recession
without a rise in inflation. Six years later,countries
in East Asia let their currencies depreciate, but
they subsequently experienced their most severe
postwar recessions along-side higher inflation.
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Q：Can the currency depreciation
improve the economy recession?
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The Main Goal
This chapter will help us to understand
the complicated factors that cause output,
exchange rates, and inflation to change
by completing the macroeconomic model
built in the last two chapters.
Our discussion combines what have
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learned about asset markets and the long
-run behavior of exchanges rates with a
new element, a theory of how the output
market adjusts to demand changes when
product prices in the economy are
themselves slow to adjust.
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Chapter Organization
1.Determinants of Aggregate Demand in an
Open Economy
2.The Equation of Aggregate Demand
3.Output Market Equilibrium in the Short Run：
DD Schedule
4.Asset Market Equilibrium in the Short Run：
AA Schedule
4.Short-run Equilibrium for an Open Economy
：Putting the DD and AA Schedules Together
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5.Temporary Changes in Monetary and Fiscal
Policies
6.Inflation Bias and Other Problems of Policy
Formulation
7.Permanent Shifts in Monetary and Fiscal
Policy
8.Macroeconomic Policies and the Current
Account
9.Gradual Trade Flow Adjustment and the
Current Account Dynamics
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Appendix
Appendix I ：The IS-LM Model and the DDAA Model
Appendix II ：Intertemporal Trade and
Consumption Demand
Appendix III：The Marshell-Lerner Condition
and Empirical Estimates of
Trade Elasticities
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The Key Points
1.DD schedule(產出市場均衡線)
2.AA schedule(資產市場均衡線)
3.AA-DD model
4.J-curve
5.pass through (轉嫁)
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Determinants of Aggregate Demand in
an Open Economy
1.Definition
Aggregate demand is the amount of a
country’s goods and services demanded by
households and firms throughout the world.
D  C (Y  T )  I  G  CA( EP / P, Y  T )
*
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The output market equilibrium is:
PY  PC  PI  PG  PEX  EP IM
*
*
EP
 Y  C  I  G  EX 
IM
P
 D  C (Y  T )  I  G  CA( EP* / P, Y  T )
 D  C (Y )  I  G  CA(q, Y )
d
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2.Output in the short run v.s. in the long run
In the long run domestic output depends on
the available domestic supplies of factors of
production.(full employment)
In the short run domestic output depends on
the aggregate demand for the country’s
output.(over-or underemployed)
3.We assume that G , I and Y* are both given.
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4.Determinants of Consumption Demand
(1)disposable income
Y  Y T
d
C  C (Y ) ; C(Y )  0
d
d
1  MPC  C(Y )  0
d
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5.Determinants of the Current Account
CA  EX  qIM
 CA( EP* / P, Y d )


given Y *
(1)How Real Exchange Rate Changes
Affect the Current Account
We assume that a representative domestic
expenditure basket includes some imported
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products but places a relatively heavier
weight on goods and services produced
domestically. And we also assume that the
Marshell-Lerner condition holds.
The Marshell-Lerner condition：
EX  IM  1
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CA  EX ( q )  qIM ( q )
dCA dEX
dIM

 ( IM  q
)
dq
dq
dq
EX
q dEX
qIM
q
dIM

(


q
)
q EX dq
EX
EX
dq
EX

( EX  1   IM )
q
 EX   IM
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dCA
1  0 
0
dq
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q dEX
 EX 
;
EX dq
q dIM
 IM  
;
IM dq
CA  0  EX  qIM
Chapter 16
the elasticity of export demand  EX
the elasticity of import demand  IM
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the value effect：
qIM
q
given IM
the volume effect： dEX  q dIM
dq
dq
the volume effect outweighs the value
effect
(2)How disposable income changes affect
the current account
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Since a rise in the disposable income
causes domestic consumers to increase their
spending on all goods, including imports
from abroad, an increase in disposable
income worsens the current account.
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The Equation of Aggregate Demand
D  C (Y  T )  I  G  CA( EP* / P, Y  T )
D  D( EP* / P, Y  T , I , G)
1.The real exchange rate and aggregate
demand
q
CA
D
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2.Real income and aggregate demand
Y
C
CA
D
A representative domestic expenditure
basket includes some imported products but
places a relatively heavier weight on goods
and services produced domestically.
3.Figure 16-1
The slope of the DD is less than 1.(MPC<1)
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Figure 16-1 Aggregate Demand as a Function of Output
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How Output Is Determined in the Short
Run
Y  D( EP / P, Y  T , I , G)
*
1.We assume that the money prices of
goods and services are temporarily fixed.
2.In the long-run equilibrium, factors of
production are fully employed, the level
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of real output is completely determined by
factors supplies, and the real exchange rate
has adjusted to equate long-run real output to
aggregate demand.
3.Figure 16-2
(1)The equilibrium is at point 1.
(2)point 2： Y  D  ED for domestic
output
Firms increase their
production. Y 2  Y 1
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(3)point 3： Y  D  ES for domestic
output.
Firms cut back on their
production.
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Figure 16-2 The Determination of Output in the Short
Chapter 16
Run
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Output Market Equilibrium in the Short
Run：the DD Schedule
1.the Assumptions： P. P * are fixed.
2.Output, the Exchange Rate, and Output
market Equilibrium
Figure 16-3
(1)Any rise(fall) in the real exchange rate
(whether due to a rise(fall) in E, P*, or a
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Figure 16-3 Output Effect of a Currency
Depreciation with Fixed Output Prices Chapter 16
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fall(rise) in P) will cause an upward
(downward) shift in the aggregate
demand
function and an expansion(decline) of
output, all else equal.
(2)Deriving the DD schedule
Figure 16-4
(3)Factors that shift the DD schedule
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Figure 16-4 Deriving the DD Schedule
Chapter 16
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Figure 16-4 continued...
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EX：a demand shift from foreign to
domestic goods
EX
, IM
CA
D
DD schedule shifts right
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Figure 16-5 Government Demand and the Position
Chapter 16
of the DD Schedule
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Figure 16-5 continued
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Table 16-1 Factors that shift the DD schedule
Factors
G
T
Yd
I
P
q
P*
q
C
MPC(d)
E or q
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D
DD schedule shift
Right
Left
Right
Left
Right
Right
Right
Right
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Conclusion：Any disturbance that raises
aggregate demand for domestic output
shifts the DD schedule to the right; any
disturbance that lowers aggregate demand
for domestic output shifts the DD schedule
to the left.
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Asset Market Equilibrium in the Short
Run ：The AA Schedule
1.Definition：The schedule of exchange rate
and output combinations that are consistent
with equilibrium in the domestic money
market and the foreign exchange market.
(1) foreign exchange market equilibrium
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Uncovered Interest Parity (UIP)
R = R* + (Ee - E )/E
(13-2)
(2)money market equilibrium
Ms / P = L ( R,Y )
(3)asset market equilibrium(R* is given)
Figure 16-6
For asset markets to remain in equilibrium,a
rise in domestic output must be accompanied
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by an appreciation of the domestic currency,
all else equal, and a fall in domestic output
must be accompanied by a depreciation.
(4)Deriving the AA schedule
The AA schedule relates exchange rates
and output levels that keep the money and
foreign exchange markets in equilibrium.
Figure 16-7
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Figure 16-6 Output and the Exchange Rate
in Asset Market Equilibrium
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Figure 16-7 The AA Schedule
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2.Factors that Shift the AA Schedule(Y fixed)
Table 16-2 Factors that Shift the AA Schedule
Factors
R
E
Ms
P
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AA shift
Right
Ms/P ,R
Left
Ee
Right
R*
Right
L
Left
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Short-Run Equilibrium for an Open
Economy：Putting the DD and AA
Schedules Together
1.Assumption：R*、 Ee 、P、P* are fixed
2.the short-run equilibrium：the intersection
of the DD and AA schedules
Figure 16-8：point 1 (R1,Y1 )
(1) the adjusting process(point 2)
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at point 2(upper than point 3)：
E can move immediately when it is away
from the equilibrium level.
E2 is higher than E3 that maintains the asset
markets equilibrium. E is expected to fall in
the foreign exchange market.
Ee < E2
It implies that the expected return of foreign
currency is lower than domestic currency.
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Investors buy domestic currency and
sell the foreign one.
E
(E2
E3 )
The E3 is higher than that keeping the
output equilibrium. That makes domestic
goods are cheaper that the level of foreign’s,
causing an excess demand for domestic
goods. The relative price of the U.S. output
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in terms of European rises.
q$ /
PE
 E$ / 
PUS
E$ /
PUS
 q$ / 
PE
The excess demand for domestic goods
makes the aggregate demand of domestic
output rise, causing the domestic output rises.
Y
L(R,Y)
R
E
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Because asset price(E) can jump immediately
, the asset markets remain in continual
equilibrium while the output market moves
gradually from point 3 to point 1.
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Figure 16-9 How the Economy Reaches
Chapter 16
Its Short-Run Equilibrium
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Temporary Changes in Monetary and
Fiscal Policy
1.Assumption：R*、 Ee 、P、P* are fixed
2.Definition：
(1)monetary policy：working through
changes in the money supply(Ms)
(2)fiscal policy：working through changes
in the government spending or taxes(G,T)
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(3)temporary：policy shifts that public
expects to be reversed in the next period
( one-shot, Ee is fixed)
3.Monetary Policy
The short-run effect of temporary increase
in the domestic money supply
(1)The policy does not affect the DD.
(2)in the money market
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Ms
there is an excess supply in the money market
R
It implies that the return of domestic currency
lowers. Investors sell domestic currency and
buy the foreign one
E
(in the foreign exchange market)
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(3)in the output market
The rising of E makes the relative price of
domestic goods rise.
the relative demand for domestic goods rises
Y
the short-run effect：E , Y
(Figure 16-10)： (E1,Y1 )
(E2,Y2 )
4.Fiscal Policy
The short-run effect of temporary increase
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Figure 16 -10 Effects of a Temporary Increase
Chapter 16
in the Money Supply
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(1)in the output market
G
the aggregate demand for domestic goods
D
Y
(2)in the money market
Y
L(R,Y)
R
(3)in the foreign exchange market
R
E
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the short-run effect：E , Y
(Figure 16-11)： (E1,Y1 )
(E2,Y2 )
5.Policies to Maintain Full Employment
(1)Figure 16-12
Suppose the economy’s initial equilibrium is
at point 1,where output equals its fullemployment level.(Yf)
(2)case1：a temporary shift in consumers
tastes away from domestic products(1
2)
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Figure 16 -11 Effects of a Temporary
Fiscal Expansion
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CD
Y
L(R,Y)
R
E
DD1
DD2
restoring full-employment policy Figure 16-12
(i)the expansion fiscal policy(point 2
1)
DD2
DD1
E,Y return the
initial level
(ii)the expansion monetary policy(point 2 3)
AA1
AA2
E ,Y returns the
initial level
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Figure 16 -12 Maintaining Full Employment After a
Chapter 16
Temporary Fall in World Demand for Domestic Products
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(3)case 2：a temporary increase in the demand
for money (point 1
2)
L(R,Y)
R
E
q
CA
D
Y (AA1
AA2 )
restoring full-employment policy
Figure 16-13
(i)the expansion fiscal policy(point 2
3)
DD1
DD2
E ,Y returns the
initial level.
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(ii)the expansion monetary policy
AA2
AA1
the initial level
E
,Y returns
6.Inflation Bias and Other Problems of Policy
Formulation
(1)inflation bias from the expectation that
people anticipate the political policies
(2)It is hard to be sure whether a disturbance to
the economy originates in the output or asset
markets.
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(3)Real-world policy choices are frequently
determined by bureaucratic necessities rather
than by detailed consideration of whether
shocks to the economy are real.
(4)Fiscal policies impact on the government
budget.
(5)time lags of varying length
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Permanent Shifts in Monetary and
Fiscal policy
1.assumption：R=R*, E=Ee ;the economy is
initially at a long-run equilibrium position
2.A permanent policy shifts affects not only
the current value of the government’s policy
instrument but also the long-run expected
exchange rate.
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3. A Permanent Increase in the Money Supply
(1)the short-run effect (Figure 16-14)
(i)A permanent increase in Ms must ultimately
lead to a proportional rise in E .The rise in
Ms causes Ee to rise proportionally.
(ii)Because a rise in Ee, the upward shift of
AA1 to AA2 (permanent) is greater than
caused by an equal, but transitory, increase.
(point 3)
(iii) E , Y , Y2 > Yf
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Figure 16 -14 Short-Run Effects of a Permanent
Chapter 16
Increase in the Money Supply
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(2)the adjustment to the long run
(Figure 16-15)
(i) Y2 > Yf
working overtime
W
AC
P
(ii)the output market
P
q
CA
D
DD shifts left (DD1
DD2)
(iii)the money market
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P
Ms/P
ED
R
(iv)the foreign exchange market
R
buying domestic currency
E
AA shifts left (AA2
AA3)
(v) E , Y returns to Yf
E1
E2
E3
overshooting
(vi)money neutrality (貨幣中立性)
E and P rise in proportion to the increase
in the money. (Y returns to Yf )
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Figure 16-15 Long-Run Adjustment to a
Permanent Increase in the Money Supply
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4.A Permanent Fiscal Policy
(1)the direct effect
G
D , DD shifts right (DD1
DD2)
E
(2)the indirect effect (E moves immediately)
G
Ee , AA shifts left(AA1
AA2)
E falls again.
(3)E ,Y returns to Yf
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Figure 16-16 Effects of a Permanent
Fiscal Expansion
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Chapter 16
(4)conclusion：
If the economy starts at long-run equilibrium,
a permanent change in fiscal policy has no
net effect on output. Instead, it causes an
immediate and permanent exchange rate
jump that offsets exactly the fiscal policy’s
direct effect on aggregate demand.
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Macroeconomic Policies and the Current
Account
1.the reasons of concerning the current account
(1)an excessive imbalance in CA may have
undesirable long-run effects on national
welfare.
(2)Large external imbalances may generate
political pressures for government
restrictions on trade.
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2.The AA-DD-XX model (Figure 16-17)
(1)XX curve：the current account balance
would be equal some desired level, X
EP
CA(
,Y  T )  X
P
(2)XX is flatter than DD
As we increase Y in moving up along DD,
the domestic demand for domestic output
rises by less than the rise in output itself
(since some income is saved and some
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spending falls on imports). Along DD total
aggregate demand has to equal supply. To
prevent an excess supply of home output, E
must rise sharply enough along DD to make
export demand rise faster than imports.
Y  C  I  G  EX  qIM
 C  I  G  CA
Y  C  EX  qIM  C  CA
Given P and P* , CA rises if E rises.
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(3)the expansionary monetary policy (point 2)
The rise in Ms causes the AA schedule
shifting right. Since point 2 lies above XX,
the CA > X, the current account improves.
conclusion： Monetary expansion causes the
current account balance to increase in the
short run.
(4)the expansionary fiscal policy (point 4)
The rise in G causes the DD schedule
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shifting right (point 3). E falls and Y rises, then
CA falls. AA shifts left (point 4). Point 3 and
point 4 are below XX, the current account
worsens. XX shift downward.
conclusion：Expansionary fiscal policy reduces
the current account balance.
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Figure 16-17 How Macroeconomics Policies
Affect the Current Account Chapter 16
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Chapter 16
shifting right (point 3). E falls and Y rises, then
CA falls. AA shifts left (point 4). Point 3 and
point 4 are below XX, the current account
worsens. XX shift downward.
conclusion：Expansionary fiscal policy reduces
the current account balance.
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Chapter 16
Gradual Trade Flow Adjustment and Current
Account Dynamics
1.The J-curve (Figure 16-18)
(1)definition：If the current account initially
worsens after a depreciation, its time path
has an initial segment reminiscent of a J.
(2)The current account can deteriorate sharply
right after a real currency depreciation
because most import and export orders are
placed several months in advance. (1
2)
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Figure 16-18 The J-Curve
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Chapter 16
(3)The primary effect of the depreciation is to
raise the value of the precontracted level of
imports in terms of domestic products.
Because exports measured in domestic
output do not change while imports measured
in domestic output rise, there is an initial fall
in the current account.
(4)Empirical evidence indicates for most
industrial countries a J-curve lasting more
than six months but less than a year.
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Chapter 16
2.Exchange rate Pass-Through and Inflation
(1)definition：The percentage by which import
prices rise when the home currency depreciates
by one percent is known as the the degree of
pass-through from the exchange rate to import
prices.
(2)Because the AA-DD model assumes that
the nominal output prices P and P* cannot
suddenly jump, movements in q correspond
perfectly in the short run movements in E.
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Chapter 16
(3)In reality the short-run correspondence
between q and E movements is less than
perfect.
Exchange rate passthrough is incomplete.
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Chapter 16
Problem：
3.Imagine that Congress passes a constitutional
amendment requiring the U.S. government to
maintain a balanced budget at all times.Thus, if
the government wishes to change government
spending, it must change taxes by the same
amount, that is, G  T always. Does the
constitutional amendment imply that the
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Chapter 16
government can no longer use fiscal policy to
affect employment and output ?(Hint：Analyze
a “balanced-budget” increase in government
spending, one that is accompanied by an equal
tax hike.)
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Chapter 16
Answer：
A temporary fiscal policy shift affects
employment and output, even if the
government maintains a balanced budget.
Y  C  I  G  EX  qIM
Y  C  G  0 ( MPC  1)
T
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Chapter 16
Appendix I to Chapter 16
The IS-LM Model and The DD-AA Model
1.The IS-LM model is a short-run equilibrium.
2.the usefulness of IS-LM model
allowing the real domestic interest rate (r) to
affect aggregate demand
2.assumption：P, P*, G, T, R*, Ee are given
C (r e ) , I (r e )

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| C (r e ) |  | I (r e ) |

龍華科技大學國貿系林淑芬

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Chapter 16
the consumption negative response to the
expected real interest rate is weaker than the
investment negative response.
C (r e )  IM (r e )  CA(r e )



3.aggregate demand function
D( EP* / P, Y  T , R   e )
 C (Y  T , R   )  I ( R   )  G  CA( EP / P, Y  T , R   )
e
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e
88
Chapter 16
4.definition
(1)the IS curve：the output market equilibrium
Y  D( EP* / P, Y  T , R   e )
 D( E P / P(1  R  R ), Y  T , R   )
e
*
*
e
 D [ E e P* / P(1  R  R* ), Y  T , R   e (Y  Y f )]
(i)from IRP： R = R* + (Ee - E )/E
Ee
E
(1  R  R* )
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Chapter 16
e
e
f



(
Y

Y
)
(ii)assumption：

(iii)a fall in the nominal interest rate (R) raises
D through two channels：
(a) R  E  CA  D  Y 
(b) R  C , I , IM  (C  I )  IM  D  Y 
(iv)from (iii) , the slope of the IS curve is
negative
(2)the LM curve：the money market equilibrium
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Chapter 16
Ms
 L ( R, Y )
 
P
the slope of the LM curve is positive
(3)The intersection of the IS and LM curves at
point 1 in Figure 16AI-1 determines the
short -run equilibrium values of output and
the nominal interest rate.The equilibrium
interest rate, in turn, determines a short-run
equilibrium exchange rate through the
interest parity condition.
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Chapter 16
Figure 16AI-1 Short-Run Equilibrium
in the IS-LM Model
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Chapter 16
5.the effects of monetary policy
Figure 16I-2： the right side: IS-LM model
the left side : IRP condition
(1)temporary increase in the money supply
Ee is given, LM curve shifts right,R ,Y ,E
(R1,Y1 ,E1 )
(R3,Y3,E3 )
(2)permanent increase in the money supply
Ms increase, LM curve shifts right
Ee , IRP-condition curve shifts outward
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Chapter 16
Ee , IS curve shifts right , IS1
IS2
The short-run equilibrium is at point 2.
The new equilibrium values of Y and R are
higher than that at the equilibrium following
an equal temporary increase.
(R1,Y1 ,E1 )
(R2,Y2 ,E2 )
6.the effects of fiscal policy
Figure 16I-3：
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Figure 16AI-2 Effects of Permanent and
Temporary Increases in the Money Supply
in the IS-LM Model
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Chapter 16
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Chapter 16
(1)temporary increase in G
Ee is given, IS curve shifts right,R ,Y ,E
(R1,Yf ,E1 )
(R2,Y2,E2 )
(2)permanent increase in G
G increase, IS curve shifts right
Ee , IRP-condition curve shifts inward and
IS curve turns back
(R1,Y2 ,E1 )
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Chapter 16
Figure 16AI-3 Effects of Permanent and Temporary
Fiscal Expansions in the IS-LM Model
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