宏观经济学 Intermediate_Macroeconomics_Lecture14

A lower domestic interest rate leads to a higher exchange rate—to a depreciation of the domestic currency. A higher domestic interest rate leads to a lower exchange rate—to an appreciation of the domestic currency.
The open-economy versions of the IS and LM relations are: Ee IS: Y = C(Y − T ) + I (Y , i ) + G + NX Y , Y * , 1+ i − i* M LM : = YL(i ) P Changes in the interest rate affect the economy
Domestic Bonds Versus Foreign Bonds

In this part, we are studying the economy in the short run, so we can make two simplifications:

Both the domestic and the foreign price levels are given; thus, the nominal and the real exchange rate move together:
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The interest-parity condition implies a negative relation between the domestic interest rate and the Ee exchange rate: i↑ ⇒ E ↓ E= 1 + i − i* i↓ ⇒ E ↑

Equilibrium in the goods market can be described by the following equations:
Equilibrium in goods market, financial market, and foreign exchange market
Y = C( Y - T ) + I( Y ,r ) + G - εIM ( Y ,ε ) + X ( Y * , ε ) ( + ) ( + ,− ) ( + ,− ) ( + ,+ ) Y = C( Y - T ) + I( Y ,r ) + G + NX ( Y ,Y * ,ε ) ( − , + ,+ ) ( + ) ( + ,− )
J. Ding, Nankai Univ.
Putting Goods and Financial Markets Together

Goods-market equilibrium implies that output depends, among other factors, on the interest rate and the exchange rate.
Macroeconomics, O. Blanchard
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Putting Goods and Financial Markets Together

Putting Goods and Financial Markets Together
The IS curve is downward sloping. The LM curve is upward sloping. An increase in the interest rate reduces output both directly and indirectly (through the exchange rate).

The IS-LM Model in the Open Economy

directly through investment, and indirectly through the exchange rate
Macroeconomics, O. Blanchard 11 J. Ding, Nankai Univ. Macroeconomics, O. Blanchard 12

Y = C (Y − T ) + I (Y , i) + G + NX (Y , Y * , E )
( + ) ( + ,− ) ( − , + ,+ )
J. Ding, Nankai Univ. Macroeconomics, O. Blanchard 5
The domestic interest rate must be equal to the foreign interest rate plus the expected rate of depreciation of the domestic currency.
J. Ding, Nankai Univ.
The Effects of Policy in an Open Economy
An increase in government spending leads to an increase in output, an increase in the interest rate, and an appreciation
i=i + E


The current exchange rate is:
E= Ee 1+ i − i*

i↑ ⇒ E ↓ i↓ ⇒ E ↑
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A monetary contraction, will cause the domestic interest rate to increase, and the demand for domestic bonds to rise. As investors switch from foreign currency to domestic currency, the domestic currency appreciates. The more the domestic currency appreciates, the more investors expect it to depreciate in the future. The initial domestic currency appreciation must be such that the expected future depreciation compensates for the increase in the domestic interest rate. When this is the case, investors are again indifferent and equilibrium prevails.
Macroeconomics, O. Blanchard
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Output, the Interest Rate, and the Exchange Rate

Equilibrium in the Goods Market

The model developed in this part is an extension of the open economy IS-LM model, known as the MundellFleming model.
Lecture 14 The Open Economy (2)
Part III Output, Interest Rate, and Exchange Rate
J. Ding, Nankai Univ.
Macroeconomics, O. Blanchard
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J. Ding, Nankai Univ.
Macroeconomics, O. Blanchard 8
J. Ding, Nankai Univ.
Macroeconomics, O. Blanchard
J. Ding, Nankai Univ.
Equilibrium in Financial Markets
The Relation Between the Interest Rate and the Exchange Rate Implied by Interest Parity


Central banks act under implicit and explicit exchange-rate targets and use monetary policy to achieve those targets. Some countries peg their currency to the dollar, to other currencies, or to a basket of currencies, with weights reflecting the composition of their trade.
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J. Ding, Nankai Univ.
Equilibrium in Financial Markets
it = i * t +

Equilibrium in Financial Markets

E e t +1 − E t Et
Suppose the expected future exchange rate is given, then: Ee − E *