文档介绍:The Monetary Approach to Balance-of-Payments and Exchange-Rate Determination
Daniels and VanHoose
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Monetary Approach
Introduction
The Monetary Approach focuses on the supply and demand of money and the money supply process.
The monetary approach hypothesizes that BOP and exchange-rate movements result from changes in money supply and demand.
Daniels and VanHoose
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Monetary Approach
Small Country Example
A small country is modeled as:
(1) Md = kPy
(2) M = m(DC + FER)
(3) P = SP*
and, in equilibrium,
(4) Md = M.
Daniels and VanHoose
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Monetary Approach
Small Country Model
The balance of payments is defined as:
(5) CA + KA = FER.
For example, if FER< 0, then CA + KA < 0, and the nation is running a balance of payments deficit.
Daniels and VanHoose
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Monetary Approach
Small Country Model
(4) and (3) into (1) yields,
M = kP*Sy.
Sub in (2),
(6) m(DC + FER) = kP*Sy.
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Monetary Approach
Small Country Model
Fixed Exchange Rate Regime
Under fixed exchange rates, the spot rate, S, is not allowed to vary.
FER must vary to maintain the parity value of the spot rate.
Hence, the BOP must adjust to any monetary disequilibrium.
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Monetary Approach
Small Country Model
Consider what happens if the central bank raises DC. Money supply exceeds money demand.
m(DC + FER) > kP*Sy
There is pressure for the domestic currency to depreciate. The central bank must sell FER until M = Md.
m(DC + FER) = KP*Sy
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Monetary Approach
Small Country Model
There has been no net impact on the monetary base and money supply as the change in FER offset the change in DC.
There results, however, a balance of payments deficit as FER < 0.
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Monetary Approach
Small Country Example
Flexible exchange rate regime:
Under a flexible exchange rate regime, the FER component of the monetary base does not change.
The spot exchange rate, S, will adjust t