2. Thomas Dürmeier Exchange Rates Regulating Global Finance E nominal exchange rate between the euro and the dollar (eg. 1,17 euro/$ = 0,85 $/euro) ε real exchange rate (epsilon) measured in purchasing power our pespective: from USA to EU E = number of units of domestic currency you can get for one unit of foreign currgency example: E USD/EUR = 1,19 $/Euro domestic foreign
3. Thomas Dürmeier Exchange Rate 2 Regulating Global Finance example: E USD/EUR = 1,19 $/Euro depreciation E ε (value of currency decreases) appreciation E ε (value of currency increases) Real exchange rate: exchange between commodities one Volkswagen P* vs. one Cadillac P 1. Volkswagen with US-price: P* x E 2. In comparison to Cadillac: (P* x E)/P = ε
4. Thomas Dürmeier Investement/Savings - Liquidity/Money: IS-LM Regulating Global Finance IS: Y = C(Y-T) + I (Y,i) + G LM: M/P = Y L(i) LM IS T , G M i Y social product nominal interest rate - only commodity and captial market - price level is constant - Keynesian bias - short-run
5. Thomas Dürmeier Aggregated Supply and Demand: AS-AD Regulating Global Finance AD: Y t = Y(M/P t , G, T) AS: P t = P t-1 (1+μ) F(1-(Y t /L), z) AS μ , L , z M , T , G P Y social product price level AD In the long-run: only AS determines Y - IS-LM plus labor market - neutrality of money - monetaristic bias - long-run
6. Thomas Dürmeier AS-AD: Neutrality of Money Regulating Global Finance AD: Y t = Y(M/P t , G, T) AS: P t = P t-1 (1+μ) F(1-(Y t /L), z) AS M , T , G P Y social product price level AD In the long-run: only AS determines Y Monetary policy has NO influence on output, only inflation. Only under certain circumstances.
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10. Thomas Dürmeier Mundell-Fleming Modell Regulating Global Finance IS: Y = C(Y-T) + I (Y,i) + G LM: M/P = Y L(i) LM IS i Y social product nominal interest rate E=E e /(1+i-i*) interest rate parity i E Exchange rate E
11. Thomas Dürmeier Mundell-Fleming Modell: flexible exchange rate and fiscal policy Regulating Global Finance IS: Y = C(Y-T) + I (Y,i) + G LM: M/P = Y L(i) LM IS G i Y social product nominal interest rate E=E e /(1+i-i*) interest rate parity i E Exchange rate E appreciation
12. Thomas Dürmeier Fixed exchange rate and fiscal policy Regulating Global Finance IS: Y = C(Y-T) + I (Y,i) + G LM: M/P = Y L(i) LM IS G i Y social product nominal interest rate E=E e /(1+i-i*) interest rate parity i E Exchange rate E IS‘ LM‘‘ Pressure on exchange rate
