MoneyandExchangeRate(国际金融-香港大学,WONGKaFu)

Expected return on a foreign asset: Et [ et+1 (Pt+1* + Dt+1* ) - etPt* ] = Et [ et+1 (Pt+1* + Dt+1* ) ] - etPt*
Expected rate of return on a foreign asset Et { [(et+1 / et ) (Pt+1* + Dt+1* ) / Pt* ] - 1 } = Et [(et+1 / et ) (Pt+1* + Dt+1* ) ] / Pt* - 1
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RHS = [Et (et+1 ) - et ] / et + Rt*
Suppose Et (et+1 ) and et fixed, larger Rt* implies larger RHS
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Uncovered Interest Parity
Suppose we care only about expected return (say, we are risk neutral) Deposit in home currency if and only if the rate of return on the deposit in home currency is not less than the deposit in foreign currency Rt [Et (et+1 ) - et ] / et + Rt* Equilibrium if Rt = [Et (et+1 ) - et ] / et + Rt*

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Expectations
Lottery 3
Pi = f(yi) probability to win yi
Expect to win
Et(y) = i Pi yi = i f(yi) yi
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Expectations
Lottery 4
f(y) probability to win y
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RHS = [Et (et+1 ) - et ] / et + Rt*
Suppose Et (et+1 ) and et fixed, larger Rt* implies larger RHS
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Uncovered Interest Parity
Suppose we care only about expected return (say, we are risk neutral) Deposit in home currency if and only if the rate of return on the deposit in home currency is not less than the deposit in foreign currency Rt [Et (et+1 ) - et ] / et + Rt* Equilibrium if Rt = [Et (et+1 ) - et ] / et + Rt*
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Uncovered Interest Parity floating exchange rate regime
If Rt > [Et (et+1 ) - et ] / et + Rt* both home and foreign investors will deposit in home currency implies supply foreign currency and demand home currency initially, e = y HD = 1 FD now, e = z HD = 1 FD , z < y hence larger RHS, i.e., towards equality

Return = et+1(Pt+1* +Dt+1* )/ - etPt*
Rate of Return = [et+1(Pt+1* +Dt+1* )/ - etPt* ]/ etPt*
Return on a foreign asset
A foreign investor invests in a foreign asset Pt+1* - Pt* + Dt+1* = Pt+1* + Dt+1* - Pt*
Expectations
Lottery 4
f(y) probability to win y
Expect to win Et(y) = E(y| information available at time t)
= y f(y) y dy
Replacing assets with deposits greatly simplifies the algebra:
Rate of return of home deposit
Et (Pt+1 + Dt+1) / Pt - 1 Pt+1 = 1 Pt = 1 Dt+1 = Rt= home interest rate Et (1 + Rt) / 1 - 1 = Rt
Expected return and expected rate of return
Rate of return on foreign deposit
[Et (et+1 ) / et ] (1 + Rt* ) - 1 = (1 + Rt* ) { [Et (et+1 ) - et ] + et ] } / et - 1 = [Et (et+1 ) - et ] / et

y The uncertainty about the value of money that no longer bore a fixed relation to gold
y Nations hoarded gold and money that could be converted into gold
Reserve currency
z Between the end of World War II and 1973, the U.S. dollar was the main reserve currency and
z almost every country pegged their currency to the U.S. dollar.
PPT文档演模板
PolicyandCoordination(国际金融(香 港大学,WONG
Lesson
z Convertibility of currencies from one to the other is an important element for y international trade and y economic development
y Reverted to barter exchange.
PPT文档演模板
PolicyandCoordination(国际金融(香 港大学,WONG
Competitive devaluation
z Other to find foreign buyers for domestic agricultural products, made these products appear cheaper by selling their national money below its real value so as to undercut the trade of other nations selling the same products.

Gold standard collapsed: Result
Between 1929 and 1932 prices of goods fell by 48 percent worldwide, and the value of international trade fell by 63 percent.
Disadvantage of gold standard
Constraints the use of monetary policy to fight unemployment Tying currency values to gold ensures a stable overall price level only if the relative price of gold and other goods and services is stable.
The uncertainty about the value of money that no longer bore a fixed relation to gold Nations hoarded gold and money that could be converted into gold Reverted to barter exchange.
Lesson
Convertibility of currencies from one to the other is an important element for
international trade and economic development
A proposal by Harry Dexter White in the US
Competitive devaluation