Chapter 29 Open Economy Macroeconomics

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1 s Part IX: in a Global Economy 28. and International Trade / 62

2 s Chapter / 62

3 s 1 s / 62

4 s Q: How did George Soros make $1 billion? 4 / 62

5 s The nominal exchange rate is the rate at which one country s currency can be exchanged for the currency of another country. In a flexible exchange rate system, the nominal exchange rate is determined by supply and demand in the foreign exchange market. Fixed or managed exchange rates are controlled by the government. 5 / 62

6 s The real exchange rate is the ratio of the prices (for example, all converted to dollars) of a basket of goods and services in two countries and thus influences net exports from one country to the other. A decline in net exports reduces labor demand and GDP and might cause unemployment. 6 / 62

7 29.1 s s Many countries have their own currencies for use in economic transactions. 7 / 62

8 s Nominal s The nominal exchange rate is the price of one (domestic) country s currency in units of another (foreign) country s currency: e = 2016/4/21: Units of foreign currency 1 Unit of domestic currency Yuan U.S.dollar, NT dollar U.S. dollar When a nominal exchange rate rises, we say that the domestic currency is appreciating. When a nominal exchange rate falls, we say that the domestic currency is depreciating. 8 / 62

9 s The nominal exchange rate can be rewritten as the price of another (foreign) country s currency in units of one (domestic) country s currency. 1 e = Units of domestic currency 1 Unit of foreign currency 2016/4/21: U.S.dollar Yuan, U.S. dollar NT dollar Exhibit 29.1 The Nominal s e and 1/e on January 2, 2014 There is a nominal exchange rate for each currency pair. 9 / 62

10 s Should Walmart s purchase toys from a Chinese or a U.S. manufacturer? Walmart needs to decide whether a toy sold by a Chinese manufacturer at a unit price of 20 yuan is less expensive by a competing U.S. manufacturer at a unit price of $5. On January 2, 2014, the yuan-dollar exchange rate was 6.05, so the dollar price of the Chinese-manufactured toy was Dollar cost = Yuan cost Dollars Yuan = Yuan cost 1 e = = $3.31 < $ / 62

11 s Flexible, Managed, and Fixed s A country can adopt one of the following: Flexible (floating) exchange rate: The government does not intervene in the foreign exchange market. Fixed exchange rate: The government fixes a value and intervenes to maintain that value. Managed exchange rate: A system between the flexible and fixed exchange rates. 11 / 62

12 s Exhibit 29.2 Yuan-Dollar and Euro-Dollar s from 1999 to January / 62

13 s 29.2 The foreign exchange market is the global financial market in which currencies are traded and nominal exchange rates are determined. The foreign exchange market can be analyzed using the supply and demand model. The price is the exchange rate e (e.g. yuan per dollar). The quantity is the amount of dollars traded in the foreign exchange market. 13 / 62

14 s The demand curve represents traders who are trying to buy dollars in the foreign exchange market with Chinese yuan. Question: Who is part of the demand curve? Air China buying a U.S. Boeing Dreamliner Apple buying parts from Chinese Foxconn Chinese government buying U.S. treasury bonds U.S. investor buying Chinese Alibaba stock 14 / 62

15 s Question: Who is part of the demand curve? O Air China buying a U.S. Boeing Dreamliner X Apple buying parts from Chinese Foxconn O Chinese government buying U.S. treasury bonds X U.S. investor buying Chinese Alibaba stock 15 / 62

16 s Exhibit 29.3 Panel (a) Under a Flexible Regime e, U.S. appreciates, demand for U.S goods quantity demanded for dollars 16 / 62

17 s The supply curve represents traders who are trying to obtain Chinese yuan by selling dollars in the foreign exchange market. Question: Who is part of the supply curve? Air China buying a U.S. Boeing Dreamliner Apple buying parts from Chinese Foxconn Chinese government buying U.S. treasury bonds U.S. investor buying Chinese Alibaba stock 17 / 62

18 s Question: Who is part of the supply curve? X Air China buying a U.S. Boeing Dreamliner O Apple buying parts from Chinese Foxconn X Chinese government buying U.S. treasury bonds O U.S. investor buying Chinese Alibaba stock 18 / 62

19 s Exhibit 29.3 Panel (b) Under a Flexible Regime 19 / 62

20 s Exhibit 29.3 Panel (c) Under a Flexible Regime Under a flexible exchange rate regime, the equilibrium exchange market is the exchange rate that equates the quantity supplied and the quantity demanded. 20 / 62

21 Question: What happens to the yuan-dollar exchange rate if Air China unexpectedly faces a higher demand for air travel in China? Air China would need more aircraft. s Exhibit 29.4 After a Rightward Shift in the Dollar Demand Curve 21 / 62

22 s How Do Governments Intervene in the Foreign Under a managed or fixed exchange rate regime, the government announces a target, or pegged exchange. Chinese authorities have historically chosen an exchange rate that makes the yuan substantially undervalued relative to the dollar. This means that the dollar is overvalued relative to the dollar. The government must be prepared to sell or buy its currency whenever the pegged exchange rate e Pegged is above or below the equilibrium exchange rate e. 22 / 62

23 s Exhibit 29.5 Under a Pegged That Overvalues the Dollar Relative to the Yuan Chinese authorities would need to soak up the excess supply of dollars by buying dollars and selling yuan. Between 1990 and 2013, the Chinese central bank increased its holding of foreign reserves from about $30 billion to more than $3,800 billion. 23 / 62

24 s Defending an Overvalued Defending an undervalued yuan appears feasible because the Chinese central bank has the right to print as many units of yuan as it wants. However, it is not easy to defend an exchange rate when your currency is overvalued such as Mexican peso. Why would the Mexican government want the peso to be overvalued and the dollar to be undervalued? Reduce the amount of pay-back in pesos for debt borrowed in dollars. Pay less for imports and keep prices and inflation low. A fall in the value of a currency is often perceived as a failure of government policies. 24 / 62

25 s Exhibit 29.6 Under a Pegged That Undervalues the Dollar Relative to the Peso The Mexican authorities need to use their pre-existing dollar reserves to keep selling dollars to sustained an overvalued pesos. What happens whey they run out of the dollar reserves? 25 / 62

26 s Fixed s and Corruption At the pegged exchange rate with undervalued dollars and overvalued local currency, the supply of dollars falls short of the demand for dollars, some of the demand for dollars will not be met by the government. The government will pick and choose who gets to sell the local currency at the price undervalues dollars. In Venezuela in 2009, the official exchange rate was 2.15 bolivares to the dollar, but the black market rate was roughly 5 bolivares to the dollar. Many government maintain overvalued exchange rates as a way of rewarding friends, cronies, and themselves. 26 / 62

27 s Q: How did George Soros make $1 billion? 27 / 62

28 s Data: rate and reserves data for the United Kingdom from 1991 to From 1990 to 1992, the British pound had an exchange rate that was pegged against the German mark. In the summer of 1992, changing market forces put pressure on the British pound to depreciate. During the summer of 1992, the British government spent about $24 billion of foreign currency reserves to defend the pegged rate. The British authorities were running low on foreign currency reserves when a new wave of pound sales hit the market on September 16, At the end of that day (Black Wednesday), the British authorities gave up trying to prop up its currency and accepted a sharp depreciation. 28 / 62

29 s Exhibit 29.7 The Mark-Pound (Marks per Pound) from January 1991 to December / 62

30 s Question: How did George Soros make $1 billion? Answer: George Soros bet against the British pound just before the depreciation of the pound. How did he do it? Throughout 1992, Soros borrowed $10 billion worth of pounds to buy German marks. Soros s pound sales and mark purchases accelerated the pace of the British government s reserves losses. On Black Wednesday, the British pound depreciated by 12%, so Soros s marks were worth more in terms of pounds. Soros paid off his pound debt and had $1 billion left in profits. By selling foreign currency reserves that would subsequently appreciate against the pound, the British government ended up with trading losses of approximately $6 billion worth of pounds. 30 / 62

31 s 29.3 Rate From the Nominal to the Real The actually crucial exchange rate for the macroeconomy and for trade is real exchange rate. U.S. importers like Walmart compare the cost of a good from China and from the United States in the same currency: Dollar price of U.S. toy Dollar price of Chinese toy Dollar price of U.S. toy = (Yuan price of Chinese toy) 1 e Dollar price of U.S. toy e = Yuan price of Chinese toy 31 / 62

32 s The real exchange rate for the United States is the ratio of the dollar price of a basket of goods and services in the United States divided by the dollar price of the same basket of goods and services in a foreign country: E = = Dollar price of U.S. toy Dollar price of Chinese toy Dollar price of U.S. toy e Yuan price of Chinese toy 32 / 62

33 Co-Movement Between Nominal and Real s Does real exchange rate follow nominal exchange rate? s Exhibit 29.8 The Nominal and the Real Pound-Dollar s from 1950 to 2010 The real exchange rate fell from 1950 to 1966, when the nominal exchange rate was fixed. After 1967, the real and nominal exchange rates moved together, although the real exchange rate keeps falling further behind. 33 / 62

34 s and Net Exports Question: What happens to U.S. exports to China and Chinese exports to the United States when the real exchange rate goes up? Question: What happens to U.S. exports to China and Chinese exports to the United States when the real exchange rate goes down? Exhibit 29.9 The Relationship Between the Real and Trade Flows 34 / 62

35 s Exhibit (E) and Net Exports Net exports = Exports Imports 35 / 62

36 s 29.4 Open Economy Analyze the macroeconomic implications of changes in the real exchange rate. Focus on an appreciation of the real exchange rate. National income accounting identity: Y = C + I + G + X M The appreciation of the real exchange rate reduces net exports and causes a decline in GDP. Suppose that the dollar appreciates and net exports decline. The foreign demand for U.S. products say, machine tools declines because U.S. goods become more expensive. 36 / 62

37 s The decline in demand for machine tools implied that machine-tool producers will shift their labor demand to the left. The leftward shift of labor demand will translate into lower employment and a new pool of unemployment workers. Exhibit Employment Falls When the Real Appreciates 37 / 62

38 s Why Have Chinese Authorities Kept the Yuan Undervalued? Answer: A weaker yuan leads to an overvalued yuan-dollar real exchange rate E. An increase in E leads to a trade deficit in the United States and therefore a trade surplus in China. Exhibit U.S. Trade Balance with China 1999 to / 62

39 s Interest Rates, s, and Net Exports Question: Can U.S. monetary policy respond to the appreciation of the real exchange rate? Answer: The U.S. Fed can pursue an expansionary monetary policy to decrease the real exchange rate. How? An expansionary monetary policy lowers U.S. interest rates. Chinese investors reduce their holdings of U.S. assets, which decreases the demand for U.S. dollars in the foreign exchange market. This will cause the nominal yuan-dollar exchange rate (e) and real exchange rate E to fall and thus U.S. net exports to increase. Contractionary monetary policy will have the opposite impact. 39 / 62

40 s Revisiting Black Wednesday Question: What is the implication for the depreciation of the pound on Black Wednesday? E = UK prices e German prices The sharp depreciation of the pound led to a decline in the pound s real exchange rate, an expansion of British net exports, and a corresponding increase in economic activity. The British economy did no well after Black Wednesday, growing on average at 3.6% per year during the next 3 years, that some commentators switched to calling the day that Soros broke the pound White Wednesday. 40 / 62

41 The Costs of Fixed se s Exhibit Real GDP Set to 100 in 2007 Many economists believe that the greater severity and duration of the economic crises in Europe has in part been due to the inability of European exchange rates to adjust. 41 / 62

42 s By using the same currency, the euro, all the European economies are pegging their exchange rates to each other. When the exchange rate can change, countries can devalue their currencies and thus increase their net exports, stimulating the economy. Compounding this problem, there is the mismatch between the needs of different European economies. In 2013, German real GDP was 5.9% above its 2007 pre-crisis level. The aggregate real GDP of Greece, Ireland, Italy, Portugal, and Spain, was 7.2% lower in 2013 than it was in / 62

43 , The Economist s 外匯存底的累積 43 / 62

44 , The Economist s 外匯存底的累積 44 / 62

45 , The Economist s 外匯存底的累積 45 / 62

46 , The Economist s 外匯存底的累積 46 / 62

47 Chapter , The Economist s 匯率政策與外匯存底外匯存底的累積 47 / 62

48 , The Economist s 外匯存底的累積 48 / 62

49 s 中央銀行總裁彭淮南 / 62

50 s 什麼是外匯存底? 外匯存底世界排名第三 ( 吳聰敏 ) 國家財富分為兩大類 : 廠房, 住宅與機器設備國外資產國外資產有些是民間持有, 其餘是央行持有, 外匯存底指的是央行所持有的國外資產央行可以印新台幣到市場上買進外匯買的多, 外匯存底就多買得少, 或者賣出外匯, 外匯存底就少外匯存底增加多, 只表示央行收行收購很多外匯, 把民間企業賺進的外匯移轉到央行手中如果央行不買外匯, 這些外匯資產不會消失, 只是歸民間所有央行為什麼要大量買進外匯? 50 / 62

51 s 平均每人國富與平均每人 GDP 為 2000 年之統計數字, 單位為 2000 年美元 51 / 62

52 央行為什麼要大量買進外匯? s 52 / 62

53 s 53 / 62

54 s 匯率制度 : 相對於台灣央行, 美國日本和歐元區的中央銀行目前已經很少直接干預外匯市場, 這些國家的匯率制度稱為浮動匯率制度 (floating exchange rate system, 又稱為 flexible exchange rate system) 相對而言, 台灣在 1980 年代中期以前採取固定匯率制度 (fixed exchage rate system), 在央行的管制或干預下, 新台幣兌美元匯率維持固定值 54 / 62

55 s 根據官方說法, 台灣央行目前係執行動態穩定之匯率政策 : 新台幣匯率制度為管理式浮動匯率制 (managed floating exchange rate system), 原則上係由外匯市場供需決定匯率水準惟匯市若有季節性或不正常干擾因素 ( 如熱錢的大量進出 ), 本行將適時調節, 以維持外匯市場的秩序 ( 中央銀行年報, 2006) 央行進一步說明, 動態穩定是指將匯率控制在均衡水準附近, 以避免出現過度波動 55 / 62

56 外匯存底與定期存單占 GDP 比例 s 大約從 2000 年開始, 央行持續買入大量外匯 ; 為了控制準備貨幣數量, 央行發行定期存單 (Certificates of Deposits, 簡稱 CDs) 以回收新台幣, 此稱為沖銷 (sterilization) 此一政策與年間相同 56 / 62

57 s 中央銀行損益表 57 / 62

58 s 中央銀行損益表 58 / 62

59 央行盈餘佔歲入比例 s 央行盈餘為占財政收入比例, 國內外利率差異為美國 10 公債之殖利率 (yield to maturity) 減去台灣商業本票利率, 天期殖利率是指擁有債券至到期日為止, 每年可獲得之收益率 2000 年以後國內外利率為何有顯著差異? 59 / 62

60 貨幣政策與利率 s 2001 年開始, 台灣央行採取寬鬆貨幣政策之後, 隔夜拆款利率相對而言都低於美國的聯邦基金利率 (Federal funds rate) 隔夜拆款利率和聯邦基金利率均為金融同業相互調借資金所需支付的借貸利率 60 / 62

61 s 貶值政策之影響 : 2000 年以來, 台灣的貨幣政策是阻升台幣加低利率政策台幣貶值政策對出口商有利, 對消費者與進口商不利貶值政策讓出口商缺乏產業升值的動機貶值政策終將招致貿易對手國的報復政策貶值政策使本國出口占 GDP 之比例持續上升, 使得本國景氣易受國外景氣影響 61 / 62

62 s 貶值政策之影響 : 長期低利率政策使大量資金流入房地產與股票市場, 可能造成泡沫低利率政策造成財富重分配, 債務人得利, 債權人不利央行大量買匯, 再加上低利率政策, 創造大量央行盈餘, 其效果等於是對存款人課稅 62 / 62

ULC ULC ULC ULC 1. 88

ULC ULC ULC ULC 1. 88 F815 Debate on the Deep Roots of European Debt Crisis Based on the Perspective of Labor Cost per Unit Output CHEN Jing-wei 1, JIANG Neng-peng 2 (1. Institute of Finance, Chinese Academy of Social Sciences,