KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 5 1 International Economics...
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Transcript of KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 5 1 International Economics...
KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 5 1
International EconomicsPart 5
Dr. Stefan KoothsBiTS Berlin
(winter term 2013/2014)www.kooths.de/bits-ie
KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 5 2
Outline
1. Introduction and Overview2. Systemizing and Recording Cross-border
Economic Activity3. The Pure Theory of International Trade4. Trade Policy: Free Trade vs. Protectionism5. Foreign Exchange Markets and the Open
Macroeconomy Foreign exchange markets and currency systems International financial investment Determination of exchange rate movements Open-economy macroeconomics
6. Case Study: The Euro Area Crisis7. Summary: The Key Lessons Learnt
KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 5 3
Exchange rates (spot vs. forward rate)
Exchange rate» Price of one nation‘s money (e.g. USD) …» … in terms of another nation‘s money (e.g. EUR)
Euro area view: 0,73 [€/$] United States view: 1,37 [$/€]
Time dimension» Spot rate: price for immediate exchange» Forward rate: price set now for an exchange in the future
KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 5 4
Currency systems: Floating vs. fixed exchange-rate systems
KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 5 5
Appreciation/revaluation and depreciation/devaluation
Floating exchange rate» Appreciation» Depreciation
Fixed exchange rate» Revaluation» Devaluation
KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 5 6
Demand for and supply of foreign exchange
Demand-side» Imports of goods and services» Capital outflows
Supply-side» Exports of goods and services» Capital inflows
KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 5 7
Arbitrage
Exploiting price differentials» Between trading centers (NY, London, Frankfurt, Tokyo, …)» Between multiple currencies
• 1,6 [USD/GBP]• 0,9 [USD/CHF]• 0,5625 [GBP/CHF]
• 1,6 [USD/GBP] 1,0227 GBP• 0,9 [USD/CHF] 1,6363 USD• 0,55 [GBP/CHF] 1 GBP = 1,8181 CHF
KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 5 8
Pegged exchange rates
KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 5 9
Defending the peg: Official interventions
KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 5 10
Exchange control
KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 5 11
International experience: From the Gold Standard until today
KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 5 12
Outline
1. Introduction and Overview2. Systemizing and Recording Cross-border
Economic Activity3. The Pure Theory of International Trade4. Trade Policy: Free Trade vs. Protectionism5. Foreign Exchange Markets and the Open
Macroeconomy Foreign exchange markets and currency systems International financial investment Determination of exchange rate movements Open-economy macroeconomics
6. Case Study: The Euro Area Crisis7. Summary: The Key Lessons Learnt
KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 5 13
Exchange rate risk and speculation
KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 5 14
Hedging and forward exchange contracts
KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 5 15
Futures, Options, Swaps
KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 5 16
The “Lake” model
KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 5 17
Covered and uncovered transactions
KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 5 18
Interest parity
Covered interest parity Uncovered interest parity
KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 5 19
Outline
1. Introduction and Overview2. Systemizing and Recording Cross-border
Economic Activity3. The Pure Theory of International Trade4. Trade Policy: Free Trade vs. Protectionism5. Foreign Exchange Markets and the Open
Macroeconomy Foreign exchange markets and currency systems International financial investment Determination of exchange rate movements Open-economy macroeconomics
6. Case Study: The Euro Area Crisis7. Summary: The Key Lessons Learnt
KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 5 20
Short run vs. long run analysis
Short-run» Asset market approach to exchange rates
(capital flows)
Long-run» Low of one price Purchasing power parity
(trade in goods and services)
KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 5 21
Asset market approach and interest rate parity
KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 5 22
Purchasing Power Parity (PPP)
KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 5 23
Absolute vs. relative PPP
KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 5 24
Monetary approach
KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 5 25
Exchange rate overshooting