M15_MISH1520_06_PPW_C14
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– Unsterilized
– Sterilized
Copyright © 2009 Pearson Prentice Hall. All rights reserved.
14-8
Intervention in the Foreign Exchange Market: Unsterilized Intervention
Results: International reserves, +1 billion Monetary base unchanged Et unchanged: no shift in demand
Copyright © 2009 Pearson Prentice Hall. All rights reserved.
Federal Reserve System
Assets Foreign Assets (international reserves) - 1 billion Liabilities Deposits with the Fed (reserves) -1 billion
Copyright © 2009 Pearson Prentice Hall. All rights reserved.
Intervention in the Foreign Exchange Market: Sterilized Intervention
• Sterilized:
Federal Reserve System
Assets (Foreign Assets) International Reserves Government Bonds –1 billion +1 billion Liabilities (Monetary Base) Curreny or Reserves 0
14-3
Intervention in the Foreign Exchange Market: the Money Supply
• The first step is to understand the impact on the monetary base and the money supply when a central bank intervenes in the foreign exchange market.
Copyright © 2009 Pearson Prentice Hall. All rights reserved.
14-14
Balance of Payments
Given these definitions, the following equation holds:
Current Account + Capital Account = Net Change in Governmental International Reserves
• Foreign exchange interventions occur when central banks engage in international transactions to influence exchange rates.
Copyright © 2009 Pearson Prentice Hall. All rights reserved.
14-5
Intervention in the Foreign Exchange Market: the Money Supply
• Suppose the Fed sells $1 billion in a foreign currency in exchange for a check written on a domestic bank.
百度文库
Copyright © 2009 Pearson Prentice Hall. All rights reserved.
14-15
Exchange Rate Regimes in the International Financial System
• There are two basic types of exchange rate regimes in the international financial system:
• Suppose the Fed sells $1 billion in a foreign currency in exchange for $1 billion in U.S. currency.
Federal Reserve System
Assets Foreign Assets (international reserves) - 1 billion Liabilities Currency or Reserves (Monetary Base) -1 billion
14-6
Intervention in the Foreign Exchange Market: the Money Supply
• a central bank’s purchase of domestic currency and corresponding sale of a foreign currency leads to an equal decline in its international reserves and the monetary base.
Copyright © 2009 Pearson Prentice Hall. All rights reserved.
14-7
Intervention in the Foreign Exchange Market: the Money Supply
• Once we understand the impact of purchases or sales, the Fed still has a decision to make. • A central bank, knowing these results, can engage in one of two types of foreign exchange interventions:
Results: Fed holding in international reserves falls by 1 billion. Currency in circulation falls by 1 billion.
Copyright © 2009 Pearson Prentice Hall. All rights reserved.
14-9
Intervention in the Foreign Exchange Market: Unsterilized Intervention
1. Initially, the sale of dollars increases the money supply, and demand shifts from D1 to D2. 2. As domestic interest rates return to original levels, the demand curve shifts back to D3. 3. Similar to previous chapter when we introduced exchange rate overshooting.
Chapter 14
The International Financial System
Chapter Preview
We also look at the controversial role of capital controls and the IMF in the international setting. Topics include:
Copyright © 2009 Pearson Prentice Hall. All rights reserved.
14-13
Balance of Payments
• The capital account shows the net receipts from capital transactions. Capital flows into a country are recorded as receipts, whereas outflows are registered as payments
• International reserves refers to a central bank’s holdings in a foreign currency.
Copyright © 2009 Pearson Prentice Hall. All rights reserved.
14-4
Intervention in the Foreign Exchange Market: the Money Supply
14-11
Balance of Payments
• This is the method for measuring the effects of international financial transactions on the economy. • The balance of payments is a booking system for recording all receipts and payments that have a direct bearing on the movement of funds between nations.
• Unsterilized:
Federal Reserve System
Assets Foreign Assets (international reserves) + 1 billion Liabilities Currency or Reserves (Monetary Base) +1 billion
– Fixed exchange rate regime
– Floating exchange rate regime
– Intervention in the Foreign Exchange Market – Balance of Payments – Exchange Rates Regimes in the International Financial System – Capital Controls – The Role of the IMF
Copyright © 2009 Pearson Prentice Hall. All rights reserved.
14-12
Balance of Payments
• The current account shows international transactions that involve currently produced goods and services. • The trade balance is part of this account, and shows the difference between exports and imports
Results: International reserves, +1 billion Monetary base, +1 billion The analysis is in Figure 14-1, Et
Copyright © 2009 Pearson Prentice Hall. All rights reserved.
Copyright © 2009 Pearson Prentice Hall. All rights reserved.
14-2
Intervention in the Foreign Exchange Market
• Foreign exchange markets are not free of government intervention.
– Sterilized
Copyright © 2009 Pearson Prentice Hall. All rights reserved.
14-8
Intervention in the Foreign Exchange Market: Unsterilized Intervention
Results: International reserves, +1 billion Monetary base unchanged Et unchanged: no shift in demand
Copyright © 2009 Pearson Prentice Hall. All rights reserved.
Federal Reserve System
Assets Foreign Assets (international reserves) - 1 billion Liabilities Deposits with the Fed (reserves) -1 billion
Copyright © 2009 Pearson Prentice Hall. All rights reserved.
Intervention in the Foreign Exchange Market: Sterilized Intervention
• Sterilized:
Federal Reserve System
Assets (Foreign Assets) International Reserves Government Bonds –1 billion +1 billion Liabilities (Monetary Base) Curreny or Reserves 0
14-3
Intervention in the Foreign Exchange Market: the Money Supply
• The first step is to understand the impact on the monetary base and the money supply when a central bank intervenes in the foreign exchange market.
Copyright © 2009 Pearson Prentice Hall. All rights reserved.
14-14
Balance of Payments
Given these definitions, the following equation holds:
Current Account + Capital Account = Net Change in Governmental International Reserves
• Foreign exchange interventions occur when central banks engage in international transactions to influence exchange rates.
Copyright © 2009 Pearson Prentice Hall. All rights reserved.
14-5
Intervention in the Foreign Exchange Market: the Money Supply
• Suppose the Fed sells $1 billion in a foreign currency in exchange for a check written on a domestic bank.
百度文库
Copyright © 2009 Pearson Prentice Hall. All rights reserved.
14-15
Exchange Rate Regimes in the International Financial System
• There are two basic types of exchange rate regimes in the international financial system:
• Suppose the Fed sells $1 billion in a foreign currency in exchange for $1 billion in U.S. currency.
Federal Reserve System
Assets Foreign Assets (international reserves) - 1 billion Liabilities Currency or Reserves (Monetary Base) -1 billion
14-6
Intervention in the Foreign Exchange Market: the Money Supply
• a central bank’s purchase of domestic currency and corresponding sale of a foreign currency leads to an equal decline in its international reserves and the monetary base.
Copyright © 2009 Pearson Prentice Hall. All rights reserved.
14-7
Intervention in the Foreign Exchange Market: the Money Supply
• Once we understand the impact of purchases or sales, the Fed still has a decision to make. • A central bank, knowing these results, can engage in one of two types of foreign exchange interventions:
Results: Fed holding in international reserves falls by 1 billion. Currency in circulation falls by 1 billion.
Copyright © 2009 Pearson Prentice Hall. All rights reserved.
14-9
Intervention in the Foreign Exchange Market: Unsterilized Intervention
1. Initially, the sale of dollars increases the money supply, and demand shifts from D1 to D2. 2. As domestic interest rates return to original levels, the demand curve shifts back to D3. 3. Similar to previous chapter when we introduced exchange rate overshooting.
Chapter 14
The International Financial System
Chapter Preview
We also look at the controversial role of capital controls and the IMF in the international setting. Topics include:
Copyright © 2009 Pearson Prentice Hall. All rights reserved.
14-13
Balance of Payments
• The capital account shows the net receipts from capital transactions. Capital flows into a country are recorded as receipts, whereas outflows are registered as payments
• International reserves refers to a central bank’s holdings in a foreign currency.
Copyright © 2009 Pearson Prentice Hall. All rights reserved.
14-4
Intervention in the Foreign Exchange Market: the Money Supply
14-11
Balance of Payments
• This is the method for measuring the effects of international financial transactions on the economy. • The balance of payments is a booking system for recording all receipts and payments that have a direct bearing on the movement of funds between nations.
• Unsterilized:
Federal Reserve System
Assets Foreign Assets (international reserves) + 1 billion Liabilities Currency or Reserves (Monetary Base) +1 billion
– Fixed exchange rate regime
– Floating exchange rate regime
– Intervention in the Foreign Exchange Market – Balance of Payments – Exchange Rates Regimes in the International Financial System – Capital Controls – The Role of the IMF
Copyright © 2009 Pearson Prentice Hall. All rights reserved.
14-12
Balance of Payments
• The current account shows international transactions that involve currently produced goods and services. • The trade balance is part of this account, and shows the difference between exports and imports
Results: International reserves, +1 billion Monetary base, +1 billion The analysis is in Figure 14-1, Et
Copyright © 2009 Pearson Prentice Hall. All rights reserved.
Copyright © 2009 Pearson Prentice Hall. All rights reserved.
14-2
Intervention in the Foreign Exchange Market
• Foreign exchange markets are not free of government intervention.