ECON 319 Lecture Notes - Lecture 4: Foreign Exchange Market, Rudi Dornbusch, Speculative Attack
9 Feb 2017
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Document Summary
Topics: flexible exchange rates, international financial flows, optimism, pessimism, and contagion, fixed exchange rates, speculative attacks on currencies, the benefits of flexible exchange rates, purchasing power parity, the policy trilemma , some central lessons. Flexible exchange rates (overview: how they work, what makes them change, expectations and overshooting. Flexible exchange rates: determined solely by market forces, without interventions by central banks. Competitive market with large numbers of entities that are participating in the exchange market. Think about this as quantity of cad in the whole exchange market vs the quantity of euros in the market. Number of euros to be swapped with cad. Supply & demand: pay attention to what the defining value is look at the foreign exchange market supply and demand and adjust accordingly. Changes in domestic p (relative to foreign p*) Changes in domestic r (relative to foreign r*) Changes in demand for domestic products or assets. Changes in domestic demand for foreign products or assets.
