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ThisPDF-filecontainsacompositionofslidesthatwereusedforcoursestaughtinourMIEPP-program.Intotal,wepresentslidesfrom6differentcoursestoyou.Wethushopetogiveyouashortimpressionofthediversityofourcurriculumwithregardtocontentaswellasmethods.Shouldyourequirefurtherinformationonthecourses,pleaseconsulttheMIEPP-webpageanddonothesitatetocontacttheparticularinstructorsdirectlywithspecificrequests.SampleCourseSlidesSampleCourseSlidesNo.1Thefollowingslidesaretakenfromthecourse:InternationalMacroeconomicsSubsection:ExchangeRatesThecourseinstructoris:Prof.PhilippHarmsHarms/InternationalMacroeconomics6-16.ExchangeRates6.1.Motivation6.2.Basicconceptsanddefinitions6.3.Therealexchangerateandpurchasingpowerparity6.4.Interestparityconditions6.5.Themonetarymodelofexchangeratedetermination6.6.TheDornbusch„overshooting“model6.7.Fundamentaldeterminantsoftherealexchangerate6.8.SummaryandoutlookHarms/InternationalMacroeconomics6-2Themonetarymodelofexchangeratedetermination•Structureandassumptions:–SmallopeneconomywithperfectinternationalcapitalmobilityRealinterestratedeterminedbyworldcapitalmarkets:(6.8)–Flexibleexchangerate(=Centralbankdoesnotinterveneonforeignexchangemarkets).–Classicaldichotomy:Realoutput,consumptionetc.areexogenous.FtHtrrHarms/InternationalMacroeconomics6-3Themonetarymodelofexchangeratedetermination•Structureandassumptions:–Realmoneydemandisgivenby(6.9)withmD,Ht:Log.ofdomesticnominalmoneydemandpHt:Log.ofdomesticpricelevelyHt:Log.ofdomesticrealincome(exogenous!)iHt:Nominalinterestratepaidonassetsheldindomesticcurrencybetweenperiodtandt+1.,0-Permanentmoneymarketequilibrium:HtHtHtHDtiypm,HtHStHDtmmm,,Harms/InternationalMacroeconomics6-4Themonetarymodelofexchangeratedetermination•Structureandassumptions:–Nominalmoneysupplyisexogenous.–Rationalexpectations:Expectationsaboutx=Conditionalexpectedvaluebasedonallinformationavailableatt(includingthemodel).jttejtxxEEt:nominalexchangerateEt:expectationsoperatorHarms/InternationalMacroeconomics6-5Themonetarymodelofexchangeratedetermination•Structureandassumptions(contd.):–(Absolute)purchasingpowerparity(PPP):(6.10)•Interpretation:Ifmeasuredinthesamecurrency,pricelevelsareidenticalacrosscountries.•Rationale:Priceindicesarebasedonidenticalgoodsbasketsandthelawofonepriceholdsforallgoods.(Moreaboutthislater…)FttHtHtFtttPEPPPEQ1Harms/InternationalMacroeconomics6-6Themonetarymodelofexchangeratedetermination•Structureandassumptions(contd.):–AbsolutePurchasingPowerParity(PPP)(contd.)•WritingthePPPconditioninlogsyields(6.11)•Differencing(6.11)yieldstherelativeversionofPPP(6.12)FtHttppeFtFttHtHtttttppppee111EEEHarms/InternationalMacroeconomics6-7Themonetarymodelofexchangeratedetermination•Structureandassumptions(contd.):–TheFisherequation:Nominalinterestrateiassumofrealinterestraterandexpectedinflation:(6.13a)(6.13b)–Combining(5.8),(5.12)and(5.13)yieldstheUIP(6.14)HtHttHtHtppri1EFtFttFtFtppri1EtttFtHteeii1EHarms/InternationalMacroeconomics6-8Themonetarymodelofexchangeratedetermination•Determiningtheexchangerate–Using(6.9),(6.11)and(6.14)yields(6.15)–Forward-iterationof(6.15)yields(6.16)1E111ttFtHtFtHtteiypmeTtTTFsHsFsHststtsteiypmeE1limE111Harms/InternationalMacroeconomics6-9Themonetarymodelofexchangeratedetermination•Determiningtheexchangerate(contd.)–Note:The“bubble”termiszerounlessthenominalexchangerateexplodes/implodes(growsinfinitelylargeinabsolutevalue).–Incaseofaspeculativebubble,thisisexactlywhathappens:Valueofasset(here:currency)growsonlybecausemarketparticipantsexpecttogrowinfuture.TtTTFsHsFsHststtsteiypmeE1limE111Fundamentalvalueofthenominalexchangerate„Bubble“termHarms/InternationalMacroeconomics6-10Themonetarymodelofexchangeratedetermination•Determiningtheexchangerate(contd.)–Assumingthatthenominalexchangeratedoesnotexplode,wecansetthelasttermontheRHSof(6.16)equaltozero,whichyields(6.17)FsHsFsHststtstiypmeE111Harms/InternationalMacroeconomics6-11Themonetarymodelofexchangeratedetermination•Interpretation–Thecurrentnominalexchangeratedependsoncurrentandexpectedfuturevaluesof...•...themoneysupply(+)•...thelevelofrealincome(-)•...thenominalforeigninterestrate(+)•...theforeignpricelevel(-)–Futurevaluesare“discounted”usingthefactor/(1+).Harms/InternationalMacroeconomics6-12Themonetarymodelofexchangeratedetermination•Interpretation(contd.)–Whydoesthefuturematterforthecurrentexchangerate?–Consequence:Expectationsabouthighernominalexchangerateinfutureresultinhighernominalexchangerateincurrentperiod.HtHtHtHtiympPricelevelincreasesinthenominalinterestrate(Effectofinterestrateonrealmoneydemand).FtHttppePPP:Nominalexchangeratedeterminedbydomesticpricelevel.1tttFtHteeiiEUIP:Nominalinterestrateincreasinginexpecteddepreciationofdomesticcurrency.Harms/InternationalMacroeconomics6-13Themonetarymodelofexchangeratedetermination•Meritsofthemonetarymodel:Whathavewelearned?–Keymessage:Currentnominalexchangeratedependingoncurrentandexpectedfuturevaluesofexogenousvariables(moneysupply,output,interestratesetc.)Importanceofexpectationsindeterminingexchangerates–Exchangerateasthepriceofanasset(dome