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International Economics Part 5

International Economics Part 5. Dr. Stefan Kooths BiTS Berlin (winter term 2013/2014) www.kooths.de/bits-ie. Outline. Introduction and Overview Systemizing and Recording Cross-border Economic Activity The Pure Theory of International Trade Trade Policy: Free Trade vs. Protectionism

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International Economics Part 5

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  1. International EconomicsPart5 Dr. Stefan Kooths BiTS Berlin(winter term 2013/2014) www.kooths.de/bits-ie

  2. Outline • Introduction and Overview • Systemizing and Recording Cross-border Economic Activity • The Pure Theory of International Trade • Trade Policy: Free Trade vs. Protectionism • Foreign Exchange Markets and the Open Macroeconomy • Foreign exchange markets and currency systems • International financial investment • Determination of exchange rate movements • Open-economy macroeconomics • Case Study: The Euro Area Crisis • Summary: The Key Lessons Learnt

  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

  4. Currency systems: Floating vs. fixed exchange-rate systems

  5. Appreciation/revaluation and depreciation/devaluation • Fixed exchange rate • Revaluation • Devaluation • Floating exchange rate • Appreciation • Depreciation

  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

  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

  8. Pegged exchange rates

  9. Defending the peg: Official interventions

  10. Exchange control

  11. International experience: From the Gold Standard until today

  12. Outline • Introduction and Overview • Systemizing and Recording Cross-border Economic Activity • The Pure Theory of International Trade • Trade Policy: Free Trade vs. Protectionism • Foreign Exchange Markets and the Open Macroeconomy • Foreign exchange markets and currency systems • International financial investment • Determination of exchange rate movements • Open-economy macroeconomics • Case Study: The Euro Area Crisis • Summary: The Key Lessons Learnt

  13. Exchange rate risk and speculation

  14. Hedging and forward exchange contracts

  15. Futures, Options, Swaps

  16. The “Lake” model

  17. Covered and uncovered transactions

  18. Interest parity • Covered interest parity • Uncovered interest parity

  19. Outline • Introduction and Overview • Systemizing and Recording Cross-border Economic Activity • The Pure Theory of International Trade • Trade Policy: Free Trade vs. Protectionism • Foreign Exchange Markets and the Open Macroeconomy • Foreign exchange markets and currency systems • International financial investment • Determination of exchange rate movements • Open-economy macroeconomics • Case Study: The Euro Area Crisis • Summary: The Key Lessons Learnt

  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)

  21. Asset market approach and interest rate parity

  22. Purchasing Power Parity (PPP)

  23. Absolute vs. relative PPP

  24. Monetary approach

  25. Exchange rate overshooting

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