Chapter 1 File
Download
Report
Transcript Chapter 1 File
Exchange Rate Economics
(FINA 611)
By
Salih KATIRCIOGLU (Ph.D)
Department of Banking and Finance – EMU
Academic Website: http://www.emu.edu.tr/salihk
Email: [email protected]
Ph.D Major in
Economic Development
&
International Economics
FINA 611
EXCHANGE RATE ECONOMICS AND POLICIES
BASIC AIMS:
International Monetary System & European Monetary System
Exchange Rate Determination: BOP Approach
Exchange Rate Determination: Flexible Prices
Exchange Rate Determination: Fixed Prices
Exchange Rate Determination: Sticky Prices
•
Currency Substitution
Selected Sources For The Course
• Selected Textbooks:
Copeland, L.S. (2000), Exchange Rates and International Finance, 3rd
Addison Wesley Publishing Company, Inc., USA.
Edition,
Eiteman, D.K., Stonehill, A.I. And Moffett, M.H. (2001), Multinational Business
Finance, 9. Edition, Addison – Wesley Publishing Company, Inc., International
Edition, USA.
Seyidoğlu, H. (2001), Uluslararası Finans, Geliştirilmiş 3. Baskı, Güzem
Yayınları, İstanbul.
Ertürk, E. (1994), Döviz Ekonomisi, Der Yayınları, İstanbul.
Peter, I. (1995), Exchange Rate Economics.
Subjects in FINA 611
Chapter 1. The Exchange Rates and International Monetary Environment
Chapter 2. Exchange Rate Determination: BOP, Prices, Parities, Interest Rates
Chapter 3. Open Economy Macroeconomics
Chapter 4. Exchange Rate Determination: Flexible Prices: The
Monetary Model
Chapter 5. Exchange Rate Determination: Fixed Prices: The Mundell-Fleming
Model
Chapter 6. Exchange Rate Determination: Sticky Prices: The Dornbush Model
Chapter 7. Currency Subsitution
Chapter 1.
•
•
•
•
•
Definition and Terminologies of Exchange Rates
International Monetary System (IMS)
European Monetary System (EMS)
Exchange Rate Regimes
Emerging Currency and Market Crises
IMS
Bretton Woods (1944)
IMF
INTERNATIONAL MONETARY FUND
– During 1998-99, total number of members in IMF
has been out of 182 countries.
o Quotas has increased from SDR 146 billion to SDR
212 billion approved by Board of Governers on
Jan 30, 1998.
o As of the end of 1998-99, IMF’s Paid In Quotas
reached SDR 208 billion (US$ 281 billion).
o And lastly, IMF’s liquidity ratio has increased to
89%.
Voting Rights and Controls in IMF
•
•
•
•
•
•
•
•
•
•
– At present (as of April 30, 1999), larger voting rights and controls for
countries:
USA
:
17.53 %
Japan :
6.29 %
Germany
:
6.15 %
France
:
5.08 %
UK
:
5.08 %
US$
Mark
Yen
French Franc
Sterling
SDR HOLDERS
= 39%,
= 21%,
= 11%,
= 11%,
= 11%
Currency Terminology
•
•
•
•
•
•
•
•
•
•
•
Exchange Rate
Floating vs Fixed Rates
Devaluation vs revaluation
Depreciation vs Appreciation
Soft Currency vs Hard Currency
Spot Exchange Rates vs Forward Exchange Rates
Forward Premium vs Forward Discount
Eurocurrencies
Exchange Rate Quotations
Interbank Quotations
Bid and Ask Quotations
Interbank Market
EXCHANGE RATE DETERMINATION
Terms
Quotas
Interbank Quotations
3 Months Forward Quotation
Spot-Forward Quotations
Percentage Terms
Spot Rate
3-month forward rate
Quotation Given as
Foreign Currency/
Home Currency/
Home Currency
Foreign Currency
105.65/$
$0.009465215/
105.04/$
$0.009520183/
Direct Quotations (In terms of Home Currency, $/)
The formula for percent premium or discount (f) =
f =
forward spot 360
100
spot
n
0.009520183 0.009465215 360
100 2.32% p.a.
0.009465215
90
For three months forward, the sign is positive indicating that the forward yen is selling at a
2.32% per annum premium over the dollar.
Indirect Quotations (In terms of Foreign currency)
spot forward 360
105.65 105.04 360
100
100 2.32% p.a.
f =
forward
n
105.04
90
Calculation of Devaluation / Revaluation
•
January 2000 1$:540,000TL
January 2001 1$:1,200,000 TL
•
Degree of Revaluation =
x1 x0 1,200,000 540,000
122.2%
x0
540,000
Degree of devaluation =
1 1
x1 x0 x0 x1 540,0001,200,000
0.55 55.0%
1
x1
1,200,000
x0
PREVIOUS CURRENCY REGIMES
1.
Pegged to Another Currency
62 Countries
2.
Pegged To a Basket
21 Countries
3.
Flexible Against a Single Currency
4 Countries
4.
Joint Float
10 Countries
5.
Adjusted According to Indicators
2 Countries
6.
Managed Float
40 Countries
7.
Independently Floating
55 Countries
Previous Currency Regimes
Ideal Currency
EMS
EUROPEAN UNION
Currently 15 Members in EU
EU 11 in MU
Non-Participants in MU
Austuria
Italy
Denmark
Belgium
Luxembourg
Greece
Finland
Netherlands
Sweden
France
Portugal
United Kingdom
Germany
Spain
Ireland
MU: Monetary Unification in EURO
New EU members
10 more new members are coming
South Cyprus plus 9 other countries
HW # 1
Which are they? And
When do they enter?
Importance of EU
Emerging Market Crises
•
•
•
•
•
Great World Depression of 1929
The Asian Crisis of 1997
The Russian Crisis of 1998
The Brazilian Crisis of 1999
Crisis in Turkish Economy in 2001
The Great Depression (1929)
Reasons:
• Shortage demand in USA
• Insufficient Liquidity and crisis in USA markets
• Problems in CA and BOP
The crisis started in USA and jumped to the entire world.
Happenings:
• Real GDP of USA declined by 40%
• Unemployment rate jumped up immediately
• Imports were restricted
• Trade balance was damaged
• World trade was damaged
The Asian Crisis (1997)
• Started in Thailand in 1997 and jumped to other Asian countries
Reasons:
•
•
•
•
•
Net exporters to net importers position
Heavy foreign foreign debt and capital outflows of Asian countries,
especially Thailand
So sudden and severe pressure on Thai Baht
On July 2, 1997, the baht was allowed to float 17% against US$ and over
12% against Japanese Yen: That means Devaluation
The crisis jumped to other Asian and world countries as a speculative
attacks.
Causal Complexities Behind Asian Crisis
•
•
•
•
Difficulties in BOP
Corporate Socialism
Corporate Governance
Banking liquidity and management
Result of Asian Crisis: Recession in Asia and Other markets
Prices and aggregate demand declined that jumped to other
countries also
The Russian Crisis (1998)
Basic Reasons:
• Deterioration of economic conditions in Russia for the years
• Heavy foreign debt that put pressure on the rubble
• Declining export revenues and damaging trade balance, one because
of the Asian crisis in 1997
• On August 10, stock prices fell by 5% that created panic in the Russian
markets
• So on August 17, the rubble was allowed to devalue by 34% during
the year
• Transition of the Russian Economy to free market economy???
The Brasilian Crisis (1999)
Reasons:
• Government’s inability to resolve CA deficits
• Domestic inflationary forces
• Lack of adjustments or floating in real for other currencies (For
example, International Fisher effect)
• These created a pressure in the real and devaluation started in
January 12, 1999
• The Russian and the Brazilian crises were also reflections of the
Asian Crisis in 1997.
Common Characteristic of all the world crises:
Problems in BOP and CA
Turkish Lira Crises
•
•
•
•
•
•
First Devaluation: September 7, 1946 by 54.3% (Immediate)
Second Devaluation: August 4, 1958 by 68.9% (Gradual)
1978: 23% devaluation against US $ (Immediate)
1979: 26.3% devaluation (Immediate)
1991: Full Convertibility of TL approved by IMF
April 5, 1994: 150% Immediate devaluation,
170% gradual devaluation
• February 21, 2001: TL moved from Managed Float into Free
(Flexible) Floating Exchange Rate System, however, it is not a pure
flexible system following again a managed float system.
19
64
19
65
19
66
19
67
19
68
19
69
19
70
19
71
19
72
19
73
19
74
19
75
19
76
19
77
19
78
19
79
19
80
19
81
19
82
19
83
19
84
19
85
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
TL/$
TL/$ Rates
Annual Average TL/US $ (1964-1998)
300,000.00
250,000.00
200,000.00
150,000.00
100,000.00
50,000.00
-
Years
19
64
19
65
19
66
19
67
19
68
19
69
19
70
19
71
19
72
19
73
19
74
19
75
19
76
19
77
19
78
19
79
19
80
19
81
19
82
19
83
19
84
19
85
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
$/STG
US $ / STG
US $ / Pound STG
3.00
2.50
2.00
1.50
1.00
0.50
-
Years
19
64
19
65
19
66
19
67
19
68
19
69
19
70
19
71
19
72
19
73
19
74
19
75
19
76
19
77
19
78
19
79
19
80
19
81
19
82
19
83
19
84
19
85
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
$/KL
US $ / South Cyprus Lira
US $ / South Cyprus Lira
3.50
3.00
2.50
2.00
1.50
1.00
0.50
-
Years
US $ / DM
US $ / DM
0.80
0.70
0.60
$/DM
0.50
0.40
0.30
0.20
0.10
1975
1976 1977
1978
1979 1980
1981
1982 1983
1984
1985 1986
1987
Years
1988 1989
1990
1991 1992
1993
1994 1995
1996
1997 1998