International Money And Finance 9

Front 1

pass through period

Back 1

the effects of a devaluation on prices
the devaluing country sees its import prices rise while export prices to foreign buyers fall

Front 2

currency contract period

Back 2

the period immediately following a devaluation when contracts negotiated prior to the devaluation come due

Front 3

empirical evidence on the j curve

Back 3

differs across countries
depends on how producers are willing to adjust their prices to counter the effect of foreign exchange rate changes

Front 4

Absorption approach to the BOT

Back 4

Total output Y= C + I + G + (X-M)
Domestic Absorption A= C + I + G
Then: (X-M) = Y-A

Whether devaluation can improve BOT depends on whether the nation is at full employment or whether we can increase Y

Front 5

Monetary Approach
2 types

Back 5

MABP: Monetary approach to the BOP
MAER: Monetary approach to the exchange rate

Front 6

MABP for:

Back 6

for a fixed exchange rate or gold standard
money flows between countries to adjust for trade imbalances

Front 7

MAER for:

Back 7

For a floating exchange rate system

Front 8

MAER model

Back 8

^E + ^Pf + ^Y= ^R +^D
^E= ^R+^D-^Pf- ^Y

Front 9

Key equations of MAER

Back 9

Money supply = Money demand

Front 10

Implications of MAER

Back 10

1. exchange rate will change to correct trade imbalances. no need for int'l capital flows
2. since the underlying assumption of MAER is PPP, countries with floating domestic inflation rate system can choose domestic inflation rates to affect external trade balances
3. countries' monetary policy will affect each other. no single open economy can disassociate itself entirely from foreign influences