tag:blogger.com,1999:blog-2546602206734889307.post8080497193948170903..comments2024-03-29T12:16:15.785+00:00Comments on mainly macro: Medium term exchange rates and current accountsMainly Macrohttp://www.blogger.com/profile/09984575852247982901noreply@blogger.comBlogger6125tag:blogger.com,1999:blog-2546602206734889307.post-27016766661892061302015-04-03T11:35:22.880+00:002015-04-03T11:35:22.880+00:00Lots of good tips in the article to do a quick Goo...Lots of good tips in the article to do a quick Google search for currency conversions. Please Visit: <br /><br /><a href="http://www.currencycalculators.org.uk/" rel="nofollow">Money Transfer Calculator</a><br /><a href="http://www.currencycalculators.org.uk/category/compare-currency-providers/" rel="nofollow">Compare Currency</a>Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-42888525831441076642013-11-11T06:42:02.592+00:002013-11-11T06:42:02.592+00:00Nick: Thanks for response. I admit I'm still ...Nick: Thanks for response. I admit I'm still lost in how all these factors work together.<br /><br />So here's a case: a (very)-small open economy as above, discovers oil leading to a rise in RER. Further assume this economy is currently has very low inflation (perhaps due to gentrification ala Japan?). There will be an increase in NER -- other nations buy the oil (or invest in oil extraction) -- and/or a decrease in inflation to create the rise in RER. Assuming the central bank wants to fight disinflation and targets exchange rates, the central bank will attempt to lower, or at least hold steady, the RER. So what happens? If the central bank can control monetary policy then RER shouldn't change. If so, your model doesn't explain the exchange rate (controlled by central bank), but tells the central bank what it must do to get its target outcome (fight increasing RER). Is that right??<br /><br />(I assume an analogous argument applies to interest rate pressures)<br /><br />Thanks, Lost wheel<br />SqueekyWheelhttp://seekingalpha.com/author/squeeky-wheelnoreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-82018071120444614672013-11-10T23:17:45.226+00:002013-11-10T23:17:45.226+00:00Squeeky: I was (implicitly) assuming the central b...Squeeky: I was (implicitly) assuming the central bank was doing what was needed to adjust the interest rate or the exchange rate to offset shocks to supply and demand to keep inflation on target. (I should have made that explicit.)Nick Rowehttps://www.blogger.com/profile/04982579343160429422noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-84458022918925146142013-11-10T17:40:46.131+00:002013-11-10T17:40:46.131+00:00What happens if nominal exchange rate (NER) or nom...What happens if nominal exchange rate (NER) or nominal interest rate (NIR) is controlled by a central bank? Does the RER push into either the other or into inflation?SqueekyWheelhttp://seekingalpha.com/author/squeeky-wheelnoreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-54871430487838240832013-11-10T13:00:21.848+00:002013-11-10T13:00:21.848+00:00I have a slightly different approach.
Let's ...I have a slightly different approach. <br /><br />Let's start with the question: what is the division of labour between the real exchange rate and the real interest rate in equilibrating demand and supply in a small open economy relative to ROW?<br /><br />My answer:<br /><br />Use the PIH to figure out how shocks (like discovering oil) will affect net demand (demand minus supply) in the SOE relative to ROW, for given real exchange rates and real interest rates.<br /><br />Decompose all shocks to net demand (relative to ROW) into a permanent component and a transitory component. (A one period shock is mostly transitory but not totally transitory, just like finding a $100 note on the sidewalk raises permanent income by (say) $5).<br /><br />1. The real exchange rate adjusts to handle the permanent component of shocks to net demand (relative to ROW).<br /><br />2. The real interest rate differential adjusts to handle the transitory component of shocks to net demand (relative to ROW).<br /><br />Now I have to figure out whether my answer is the same as yours, and if not, how to reconcile them.<br /><br />BTW, I don't think it matters for this question whether goods markets are perfectly or imperfectly competitive. It does matter whether domestic-produced goods are perfect or imperfect substitutes for foreign-produced goods. Because if they were perfect substitutes PPP holds. The more perfect the degree of substitutability, the less the real exchange rate needs to adjust.Nick Rowehttps://www.blogger.com/profile/04982579343160429422noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-49052191318768943382013-11-10T09:55:10.541+00:002013-11-10T09:55:10.541+00:00Are you thinking of the IMF crisis of 1976? I took...Are you thinking of the IMF crisis of 1976? I took these notes:<br /><br />Other than USA, other industrialised nations saw a similar rise in their public expenditure 1972-6 and continued to grow to 1978, whereas UK’s fell back 1976-8 to nearly half-way to 1972 level. The problem for the UK was 1972-6 rise of inflation of 79%. In 1976 Belgium, France, and Italy all had balance of payments comparable with the UK, but none of these nations were a reserve currency and so exposed to large-scale withdrawals and they also held large reserves of foreign exchange. <br /> In January 1977 £1.2 billion of the IMF loan was used and £384 million in May and August 1977, thus less than half of the loan was used. <br /> In 1974 the economy was fully employed. North sea oil in 1978 was contributing £2.5 billion more than 1974. As such, the 1976 IMF crisis was a problem of borrowing until international prices moderated and north sea oil came on stream. 1974-5 borrowing was short-term and unstable. <br /> Interest rates in UK fell because of inflow of funds and the strength of sterling:<br /> Oct 1976 = 15%<br /> Feb 1977 = 12%<br /> May 1977 = 8%<br /> Oct 1977 = 5%<br />Real wages grew 1970-4 by the high rate of 19%, but 1974-9 only 8%. 1970s inflation caused slow growth, was hard on profits, and kind to wages. <br /> North sea oil, especially up to 1986, gave a large surplus and freedom from balance of payment difficulties, unlike early and mid 1970s. <br />Anonymousnoreply@blogger.com