● o Intermediate Macroeconomics Lecture 16
Intermediate Macroeconomics Lecture 16
°°° Interest-Rate Differentials o Country risk ex-rate expectations Country risk Political upheaval > default on loan repayments higher i-rate to compensate 2. EX-rate expectations expect RMB to appreciate )loans in RMb can pay a lower i-rate
2 Interest-Rate Differentials Country risk & ex-rate expectations 1. Country risk Political upheaval → default on loan repayments → higher i-rate to compensate 2. Ex-rate expectations expect RMB to appreciate → loans in RMB can pay a lower i-rate
°°° Interest-Rate Differentials o $100, RMB 8/$, US: 5%. How large should the i-rate be in China, so that returns in 2 countries will be the same after 1 year Depends on the ex-rate after 1 year How can we know the ex-rate after 1 year? depends on expectation
3 Interest-Rate Differentials $100, RMB 8/$, US: 5%. How large should the i-rate be in China, so that returns in 2 countries will be the same after 1 year? Depends… on the ex-rate after 1 year How can we know the ex-rate after 1 year? → depends on expectation
°°° Interest-Rate Differentials If expected ex-rate is still RMB 8/S →5% If expected ex-rate is RMB 7/$ 100*(1+5%)=$105 $105*RMB7/$=RMB735 800*(1+)=735 i=-8.125%
4 Interest-Rate Differentials If expected ex-rate is still RMB 8/$ → 5% If expected ex-rate is RMB 7/$ 100 * (1+5%) = $105 $105 * RMB 7/$ = RMB 735 800 * (1+i) = 735 i = - 8.125%
°°° Interest-Rate Differentials o Differentials in the m-f model Ze-O Y=E=C(r-T)+I(r*+0)+G+NX(e) M/Z (十O,)
5 Interest-Rate Differentials Differentials in the M-F Model r = r*+ Y = E = C(Y −T) + I(r *+) + G + NX(e) M / P = L(r *+,Y)
°°° Interest-Rate Differentials political turmoil or expect el isk premium个 LM
6 Interest-Rate Differentials political turmoil or expect e↓ → risk premium ↑ Y e IS* LM*
°°° Interest-Rate Differentials Implication although it and l, the depreciation of the currency stimulates NX by a greater amount, so that aggregate Income/ output↑
7 Interest-Rate Differentials Implication: although i↑ and I ↓, the depreciation of the currency stimulates NX by a greater amount, so that aggregate income/output ↑
°°° Interest-Rate Differentials o However, such a boom does not occur Central bank will defend the currency 2. P for imports↑+MP↓ 3. Risk premium↑& D for money↑ simultaneously (M/P=L(r+e,Y
8 Interest-Rate Differentials However, such a boom does not occur! 1. Central bank will defend the currency 2. P for imports↑→ M/P↓ 3. Risk premium↑ & D for money↑ simultaneously (M/P = L (r*+θ,Y))
°°° Interest-Rate Differentials o Mexico 1994-95 Beginning of 1994: NAFTA Political situation Risk premium t under fixed ex-rate End of 1994: devaluation of peso Risk premium↑ further Stock market crashed Government hard to get new bonds issued
9 Interest-Rate Differentials Mexico 1994-95 Beginning of 1994: NAFTA Political situation Risk premium ↑ under fixed ex-rate End of 1994: devaluation of peso Risk premium ↑ further Stock market crashed Government hard to get new bonds issued
°°° Interest-Rate Differentials oAsa1997-1998 Thailand. South Korea. Indonesia Asian banking system (high default rate of loans due to govern Intervention in the banking system 10
10 Interest-Rate Differentials Asia 1997-1998 Thailand, South Korea, Indonesia… Asian banking system (high default rate of loans due to govern. Intervention in the banking system)