KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 5 1 International Economics Part 5 Dr. Stefan Kooths BiTS Berlin (winter term 2013/2014)

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Presentation transcript:

KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 5 1 International Economics Part 5 Dr. Stefan Kooths BiTS Berlin (winter term 2013/2014)

KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 5 2 Outline 1.Introduction and Overview 2.Systemizing and Recording Cross-border Economic Activity 3.The Pure Theory of International Trade 4.Trade Policy: Free Trade vs. Protectionism 5.Foreign Exchange Markets and the Open Macroeconomy  Foreign exchange markets and currency systems  International financial investment  Determination of exchange rate movements  Open-economy macroeconomics 6.Case Study: The Euro Area Crisis 7.Summary: The Key Lessons Learnt

KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 5 3 Exchange rates (spot vs. forward rate)  Exchange rate »Price of one nation‘s money (e.g. USD) … »… in terms of another nation‘s money (e.g. EUR)  Euro area view: 0,73 [€/$]  United States view: 1,37 [$/€]  Time dimension »Spot rate: price for immediate exchange »Forward rate: price set now for an exchange in the future

KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 5 4 Currency systems: Floating vs. fixed exchange-rate systems

KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 5 5 Appreciation/revaluation and depreciation/devaluation  Floating exchange rate »Appreciation »Depreciation  Fixed exchange rate »Revaluation »Devaluation

KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 5 6 Demand for and supply of foreign exchange  Demand-side »Imports of goods and services »Capital outflows  Supply-side »Exports of goods and services »Capital inflows

KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 5 7 Arbitrage  Exploiting price differentials »Between trading centers (NY, London, Frankfurt, Tokyo, …) »Between multiple currencies 1,6 [USD/GBP] 0,9 [USD/CHF] 0,5625 [GBP/CHF] 1,6 [USD/GBP]  1,0227 GBP 0,9 [USD/CHF]  1,6363 USD 0,55 [GBP/CHF]  1 GBP = 1,8181 CHF

KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 5 8 Pegged exchange rates

KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 5 9 Defending the peg: Official interventions

KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 5 10 Exchange control

KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 5 11 International experience: From the Gold Standard until today

KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 5 12 Outline 1.Introduction and Overview 2.Systemizing and Recording Cross-border Economic Activity 3.The Pure Theory of International Trade 4.Trade Policy: Free Trade vs. Protectionism 5.Foreign Exchange Markets and the Open Macroeconomy  Foreign exchange markets and currency systems  International financial investment  Determination of exchange rate movements  Open-economy macroeconomics 6.Case Study: The Euro Area Crisis 7.Summary: The Key Lessons Learnt

KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 5 13 Exchange rate risk and speculation

KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 5 14 Hedging and forward exchange contracts

KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 5 15 Futures, Options, Swaps

KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 5 16 The “Lake” model

KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 5 17 Covered and uncovered transactions

KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 5 18 Interest parity  Covered interest parity  Uncovered interest parity

KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 5 19 Outline 1.Introduction and Overview 2.Systemizing and Recording Cross-border Economic Activity 3.The Pure Theory of International Trade 4.Trade Policy: Free Trade vs. Protectionism 5.Foreign Exchange Markets and the Open Macroeconomy  Foreign exchange markets and currency systems  International financial investment  Determination of exchange rate movements  Open-economy macroeconomics 6.Case Study: The Euro Area Crisis 7.Summary: The Key Lessons Learnt

KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 5 20 Short run vs. long run analysis  Short-run »Asset market approach to exchange rates (capital flows)  Long-run »Low of one price  Purchasing power parity (trade in goods and services)

KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 5 21 Asset market approach and interest rate parity

KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 5 22 Purchasing Power Parity (PPP)

KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 5 23 Absolute vs. relative PPP

KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 5 24 Monetary approach

KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 5 25 Exchange rate overshooting