International Economic II

1. International Economic II Lecture 04 What Determines Exchange Rates? （汇率决定理论） Shandong University of Finance

2. Objectives This chapter focuses on what we know about the determinants of exchange rates (what causes floating rates to change or the pressures on a system of fixed rates）

3. Objectives After completing this chapter, you will be able to: • Identify the market fundamentals which underlie movements in exchange rates. • Understand the influence of international financial investors’ perceptions and actions on exchange rates in the short run (Asset Market Approach to Exchange Rates)

4. Objectives (Con’t) • Discuss how the Purchasing Power Parity (PPP) defines the relationship between product prices and exchange rates in the long run. • Examine the role of money supply and demand as a determinant of exchange rates (Monetary Approach to Exchange Rate) • Explain how the volatility of exchange rates is influenced by the phenomenon of overshooting.

5. Road Map I. Introduction II. (The Short Run) Asset Market Approach to Exchange Rates III. The Long Run: Purchasing Power Parity (PPP) IV. The Long Run: Monetary Approach to Exchange Rate V. Short Run to Long Run: Overshooting

6. I. IntroductionWhat you need to know before we start • i. What we can see behind the figure 5.1 • (Three types of variability for the exchange rate after the modern era of floating exchange rates) • ii. What factors determine the three trends of the changes in exchange rates? • iii. When are these forces important?

7. Appreciate depreciate

8. i. Three types of variability for the exchange rate 1. There are long-term trends in which some currencies tend to appreciate against the dollar, and other tends to depreciate. 2. There are medium-term trends which are sometimes counter to the longer trends. 3. There is a substantial variability during the short run.

9. I. IntroductionWhat you need to know before we start • i. What we can see behind the figure 5.1 • (Three types of variability for the exchange rate after the modern era of floating exchange rates) • ii. What factors determine the three trends of the changes in exchange rates? • iii. When are these forces important?

10. 投资者耐心耗尽 美日再刷纪录新低 2011.10.22 正在市场对周末峰会成果期待满满，各大风险币种趁势大幅攀升之际，美元/日元却不合时宜地跌向了纪录新低，为周日峰会饕餮盛宴呈上了最为丰盛的前餐。　　分析人士指出，这主要归因于投资者对于日本当局“头痛医脚”、“口头干预”式举措失去了耐心。一时间，美元/日元抛盘四处涌现，再加上止损卖盘的触发，使得汇价跌势一发不可收拾。　　周五(10月21日)纽约时段午盘，美元/日元在刷新75.78水平的纪录新低后有所回暖，目前汇价交投于76.10水平上方。

11. 欧元搭乘G20峰会快车 上行之路仍危机四伏 2011.10.15 对于20国集团(G20)会议将推出欧债危机解决方案的良好预期成为以欧元为首的风险资产本日大涨的核心推力。但许多分析人士对于该涨势的可持续性表示忧虑，可以料想的是，一旦G20会议“大跌眼镜”，欧元走势亦将如法炮制。　　周五(10月14日)纽约时段午盘，欧元/美元在早盘刷新1.3893水平的一个月高点后有所回落，目前汇价交投于1.3850水平附近。

12. 人民币汇率创新高 旨在安抚市场 2011.9.27 周一，中国央行将人民币兑美元汇率中间价调至新高。市场参与者说，这一出人意料的举动旨在向紧张不安的投资者发出信息。这些投资者日渐怀疑中国做出的让人民币逐渐升值的承诺。 • 　　周一交易开始前，中国央行将人民币兑美元中间价调至1美元兑人民币6.3735元，这是自2005年中国政府实施汇率改革以来人民币中间价创下的最高纪录。 • 　　北京一家银行的交易员称央行此次上调人民币中间价“完全出乎意料”，并说此举表明中国央行正在向市场发送强烈信号，即尽管国外主权债务危机愈演愈烈，但其不会让人民币贬值。

13. 标普意外下调意大利评级 欧元再遭痛击 2011.9.27 周二(9月20日)亚市早盘，因标普下调意大利评级，欧元/美元自1.3680一线快速下跌至1.3600上方附近。标普此举令人意外，并有可能加剧投资者对欧债危机蔓延的担忧情绪。　　该机构指出，意大利脆弱的执政联盟以及议会内部的政策分歧，有可能继续限制政府对国内外宏观经济环境带来的挑战作出果断应对的能力。

14. G20“货币战停火协议”生效？ 美元再跳水 2010.10.26 至少从金融市场的反应看，刚刚结束的G20财金高官会议没有白开。周一，美元汇价全面大幅下跌，兑日元一度创15年新低，股票和商品等风险资产则纷纷走高。有分析认为，G20高官会议承诺抵制竞争性贬值的“货币战争”，这可能帮助消除近期的一项主要风险。 25日伦敦早盘，依据16种贸易伙伴货币编制的美元指数大跌逾0.6%，至76.7附近。其中，美元兑日元一度大跌超过1.1%，低见80.41，再创15年新低；欧元兑美元则一度大涨0.8%，至1.4080一线。苏格兰皇家银行的外汇策略师科尔表示，G20的会议公报似乎表明，各国在避免出现贸易和货币大战方面迈出了一小步，这帮助提振风险资产的表现，同时对美元构成打压。

15. “中国央行意外升息 美元趁势掀起反击 ” 2010.10.20 由于中国人民银行(PBOC)意外宣布升息，引发市场避险情绪，美元受到投资者追捧，美元兑主要货币周二(10月19日)全线上扬，美元指数突破78.00关口并刷新日内高点78.26水平。美元大反攻似乎已指日可待，但美联储(Fed)进一步放宽货币政策的预期始终是笼罩于美元上方的阴影，美元长期前景尚不乐观。 中国人民银行早前宣布，自10月20日起上调金融机构一年期存款基准利率上调0.25个百分点，由现行的2.25%提高到2.50%；一年期贷款基准利率上调0.25个百分点，由现行的5.31%提高到5.56%。消息公布后，投资者普遍担心此项政策将抑制中国经济增速，市场风险厌恶情绪迅速升温，美元在避险需求推动下兑主要货币大幅上扬，其中美元/加元盘中一度上涨超过200点。

16. 美元兑人民币迭创新低 日元上演“变脸”大戏 2010.9.20 亚洲货币成为上周外汇市场的热点话题。始于9月伊始的人民币升值之旅，在上周依旧是大步流星。与此同时，身陷“弱经济、强货币”怪圈的日本政府终于出手干预汇市，干预突袭令日元兑美元遭遇单日暴跌。 上周三（15日），日本央行终于出手干预汇市。当天亚市早盘，美元兑日元在触及15年新低82.86后上演惊天逆转，单日上涨超过3%。因忌惮日本政府再度干预，随后两个交易日美元兑日元交投沉闷，周五收于85.84。 尽管干预突袭令日元兑美元4个月来的升值步伐戛然而止，干预预期的存在也将限制日元的波动幅度，然而，一些研究机构认为，日本货币当局直接干预外汇措施在长期难以起到明显的效果。

17. 人民币短期“被升值”不可避免 2010.9.28 即使人民币对美元中间价连续10天升值，美众议院筹款委员会依然在9月24日通过了一项旨在对所谓低估本币汇率的国家征收特别关税的法案。 从近期美国总统奥巴马及其相关政府官员一系列针对中国人民币低估的言论，到通过这项征收特别关税的法案，美国对中国人民币汇率的针对性可见一斑。 在此期间，人民币对美元的持续升值似乎也反映了这种趋势。从现象来看，人民币对美元连续突破6.8与6.7两个关口，不断创出新高，而且短期的幅度较大，有点前期日元上涨的味道。但是结合当前西方国家尤其是美国的言论来看，人民币这种连续10天的升值倒有点在逼迫下“被升值”的意味。尽管人民币有着升值的大趋势。

18. “负面数据接连不断 美元先扬后抑 ” 2010.8.30 在经济下滑的系统性风险面前，即便是一直充当传统避险货币的美元也难以独善其身。上周，当负面数据如潮水般袭来时，美元一改“受益者”的姿态，后半周连续遭遇调整。至上周五，美元指数连跌三日，最新报82.74点，较前一周下跌0.34%。 上周，美国迎来了众多关键的经济数据。其中包括备受关注的美国二季度国内生产总值(GDP)修正值、耐用品订单、反映房市的成屋销售及新屋销售数据、显现就业市场动向的初请失业金数据，以及反映美国消费者乐观程度的密歇根大学消费者信心指数。尽管在正式披露之前，投资者多已预料到这些数据将成为美国经济复苏放缓的新证据。然而，按照疲软经济数据引发避险需求这一贯有逻辑，“弱数据”反而可能会成为美元进一步上行的推手。

19. 宽松规模待字闺中 美元玩“蹦极”不差钱 2010.10.26 美元兑主要货币近期变化无常，频繁“蹦极”，可谓涨跌无度。目前市场对于美联储(FED)量化宽松的预期已几近“产生共识”，而资产购买规模大小已成为现在的唯一问号。

20. “紧盯美联储脸色 牛气日元再创15年新高 ” 2010.10.26 继日本央行货币政策会议之后，美联储货币政策会议将在下月初召开，市场高度关注美国是否将进一步放松货币政策。在此背景下，美元兑欧元等主要货币继续贬值。在昨日的亚洲交易时段，日元兑美元一度触及80.4水平，再创15年以来的新高。 日本经济财政大臣江田万里日前表示，日本央行可能考虑通过购买外币资产以缓解日元的升值压力。但江田万里强调，一旦央行实施扩张性货币政策，必然带来巨大的风险，央行将量力而行。东京三菱银行分析人士表示，由于短线投资者从G20报告看到，各国都将尽力阻止竞争性货币贬值，从而可能使本周日元兑美元达到历史高点79.75。

21. 欧洲利好频出，欧元英镑仍处“观察期” 2010.8.19 欧洲利好频出：葡萄牙顺利售债，英国央行未出现鸽派信号，冰岛央行加息……市场避险情绪进一步消退，不过，正在关键点位徘徊的欧元和英镑，目前仍处在“观察期”之中，需要不断的“药物”补充，方可缓解短线的下行压力。

22. The factors can fall into two catalogues: Market fundamentals (economic variables) Market expectations Current account balances Real income Real interest rates Inflation rates Consumer preferences for domestic or foreign products Productivity changes affecting production costs Profitability and riskiness of investments Product availability Monetary policy and fiscal policy Government trade policy ii. What factors determine the three trends of the changes in exchange rates? • News about future market fundamentals • Speculative opinion about future exchange rates

23. I. IntroductionWhat you need to know before we start • i. What we can see behind the figure 5.1 • (Three types of variability for the exchange rate after the modern era of floating exchange rates) • ii. What factors determine the three trends of the changes in exchange rates? • iii. When are these forces important?

24. Short run (days) - financial transfers Differences in real interest rates (If) Shifting expectations of future exchange rates (eex) Medium run (months) Economic cycles Long run (years) - movements of goods, services, investment, influenced by: Inflation rates (Relative PPP) Investment profitability Consumer tastes Real income Productivity Trade policy iii. When are these forces important? Asset market approach to exchange rates The Monetary Approach to the exchange rates

25. iii. When are these forces important? The exchange rates are simultaneously determined by long-run structural, medium-run cyclical, and short-run speculative forces.

26. Exchange rate components

27. Road Map I. Introduction II. (The Short Run) Uncovered Interest Parity III. The Long Run: Purchasing Power Parity (PPP) IV. The Long Run: Monetary Approach to Exchange Rate V. Short Run to Long Run: Overshooting

28. II. Uncovered Interest Parity • Premise: Uncovered Interest Parity EUD = (1+iuk)∙ eex /e – (1+ius) = 0 • Uncovered Interest Parity links together four variables: the domestic interest rate (i), the foreign interest rate (if), the current spot exchange rate (e), and the expected future spot exchange rate (eex).

29. Figure 5.2 Determines of the Exchange Rate in the Short Run (1+if)∙ eex = (1+i)• e

30. i. The role of Interest Rates ( i, if) • If iincreases/decreases (with ifand eexunchanged), then edecreased/increased • If ifincreases/decreases, with i, eex unchanged, then eincreased/decreased. • If both interest rates change at the same time, what matters is the interest rate differential (i-if)

31. ii. The role of the Expected Future Spot Exchange Rate (eex) • Effects: If, eexincrease—e increases If, eex decrease—e decreases • What determines the expectations (eex ) a. Bandwagon Effects— “destabilizing” b. Exchange rates eventually return to values consistent with basic economic conditions (i.e. PPP)- “stabilizing”

32. Road Map I. Introduction II. (The Short Run) Asset Market Approach to Exchange Rates III. The Long Run: Purchasing Power Parity (PPP) IV. The Long Run: Monetary Approach to Exchange Rate V. Short Run to Long Run: Overshooting

33. Gustav Cassel，1866-1945 III. Purchasing Power Parity (PPP) • The law of One Price • Absolute Purchasing Power Parity • Relative Purchasing Power Parity • Relative PPP: Recent Experience

34. i. The law of One Price • The law of one price posits that a product that is easily and freely traded in a perfectly competitive global market should have the same price everywhere, once the prices at different places are expressed in the same currency. P = Pfe--or--e = P/Pf • The law of one price works well for heavily traded commodities BUT, for many products, the law of one price does not hold closely.—WHY?

35. ii. Absolute Purchasing Power Parity Absolute Purchasing Power Parity posits that a basket or bundle of tradable products will have the same cost in different countries if the cost is stated in the same currency. P = Pfeore = P/Pf (P and Pf refer to the average product price or price level in the domestic and foreign country）

36. iii. Relative Purchasing Power Parity • Relative Purchasing Power Parity posits that the difference between changes over time in product-price levels in two countries will be offset by the change in the exchange rate over this time. (From time 0 to time t): Pt Pf,t . et P0 Pf,0 e0

37. iii. Relative Purchasing Power Parity • or et Pt Pf,0 e0 P0 Pf,t • or, approximately: Rate of appreciation of the Foreign currency = л-лf

38. iii. Relative Purchasing Power Parity • Predictions about exchange rate trends, esp. in the long run: Low inflation rates – currency’s value tend to appreciate High inflation rates – currency’s value tend to depreciate • The rate of appreciation or depreciation will be approximately equal to the percentage-point difference in the inflation rates.

39. 英国《经济学家》杂志的“汉堡经济报告” 　　“汉堡经济报告”的基础是购买力平价理论。这份报告研究的商品是麦当劳的麦香汉堡，约120个国家的麦当劳都提供这种汉堡。调查结果发现，美国麦香汉堡的平均含税售价是2．54美元。麦香汉堡售价最便宜的国家为中国大陆、马来西亚，售价低于1．2美元，表示这些国家的币值被严重低估。售价最高的国家包括英国、丹麦与瑞士，这些国家的币值则最受高估。 “Big Mac Index麦香汉堡指数” 最大的成就是追踪欧元币值波动。1999年1月欧元正式启用时，几乎所有人都预测欧元会对美元升值，但是“麦香汉堡指数”却显示，欧元一开始就被过度高估。索罗斯基金管理公司承认欧元启用之初曾仔细考量“麦香汉堡指数”的卖出欧元信号，不久后却决定忽略这项信息。后来，欧元果然大幅贬值。

40. Big Mac index • The Economist's Big Mac index is based on the theory of purchasing-power parity, under which exchange rates should adjust to equalise the cost of a basket of goods and services, wherever it is bought around the world. Our basket is the Big Mac. The cheapest burger in our chart is in China, where it costs $1.30, compared with an average American price of $3.15. This implies that the yuan is 59% undervalued.

42. iv. Relative PPP: Recent Experience Main Conclusion: PPP holds reasonably well in the long run, but poorly in the short run • Figure 5.3- evidence on the long run inflation differential is positive – appreciate inflation differential is negative – depreciate • Figure 5.4-evidence of individual countries over time (The exchange rate e consistent with PPP – e =P/ Pf)

43. Road Map I. Introduction II. (The Short Run) Asset Market Approach to Exchange Rates III. The Long Run: Purchasing Power Parity (PPP) IV. The Long Run: Monetary Approach to Exchange Rate V. Short Run to Long Run: Overshooting

44. IV. Monetary Approach to Exchange Rate What determines the average national price level of the rate at which it change, the inflation rate? • Money, Price levels and Inflations • Money and PPP combined • Effect of Money Supplies on an Exchange Rate • Effect of Real Incomes on an Exchange Rate

45. i. Money, Price levels and Inflations • Supply: Money Supplies in different countries, through their links to national price levels and inflation rates, are closely linked to exchange rates in the long run.

46. i. Money, Price levels and Inflations • Demand: The transaction demand varies with the annual turnover of transactions requiring money, a turnover that is fairly well proxied by the money value of GDP.

47. i. Money, Price levels and Inflations • The quantity theory equation says that in any country the money supply is equated with the demand for money, which is directly proportional to the money value of gross domestic product. Ms = k  P  Y and Msf = kf Pf Yf • Combine the two equations: P/Pf = (Ms/Msf) (kf/k) (Yf/Y)

48. ii. Money and PPP combined • Combining the absolute PPP equation with the quantity theory equations: e = P/Pf = (Ms/Msf) (kf/k) (Yf/Y) • Effects (e—Ms,Msf ,Yf ,Y) • An exchange rate will be unaffected by balanced growth

49. iii. Effect of Money Supplies on an Exchange Rate (Ms) Msf decreases 10% e increase 10% Ms increases 10% e increase 10% Msf Ms increases 10% e unchanged

50. iv. Effect of Real Incomes on an Exchange Rate (Y) Yfincreases 10% e increases 10% Y decreases 10% e increases 10% • What causes it to change has a great effect on an exchange rate: Supply-side reason--strengthen the pound by using the quantity theory equation Demand-side reason-- the increase might or might not strengthen the pound.