克鲁格曼第八版-国际金融下答案Chap16

Chapter 16

Output and the Exchange Rate

in the Short Run

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Chapter Organization

Determinants of Aggregate Demand in an Open Economy

Determinants of Consumption Demand

Determinants of the Current Account

How Real Exchange Rate Changes Affect the Current Account

How Disposable Income Changes Affect the Current Account

The Equation of Aggregate Demand

The Real Exchange Rate and Aggregate Demand

Real Income and Aggregate Demand

How Output is Determined in the Short Run

Output Market Equilibrium in the Short Run: The

DD

Schedule

Output, the Exchange Rate, and Output Market Equilibrium

Deriving the

DD

Schedule

Factors that Shift the

DD

Schedule

Asset Market Equilibrium in the Short Run: The

AA

Schedule

Output, the Exchange Rate, and Asset Market Equilibrium

Deriving the

AA

Schedule

Factors that Shift the

AA

Schedule

Short-Run Equilibrium for the Economy: Putting the

DD

and

AA

Schedules Together

Temporary Changes in Monetary and Fiscal Policy

Chapter 16

Output and the Exchange Rate in the Short Run

77

Monetary Policy

Fiscal Policy

Policies to Maintain Full Employment

Inflation Bias and Other Problems of Policy Formulation

Permanent Shifts in Monetary and Fiscal Policy

A Permanent Increase in the Money Supply

Adjustment to a Permanent Increase in the Money Supply

A Permanent Fiscal Expansion

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Eighth Edition

Macroeconomic Policies and the Current Account

Gradual Trade Adjustment and Current Account Dynamics

The

J

-Curve

Exchange-Rate Pass-Through and Inflation

Box: Exchange Rates and the Current Account

Summary

Appendix I: Intertemporal Trade and Consumption Demand

Appendix II: The Marshall-Lerner Condition and Empirical Estimates of Trade Elasticities

Online Appendix: The

IS

-

LM

and the

DD

-

AA

Model

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Chapter Overview

This chapter integrates the previous analysis of exchange rate determination with a

model of short-run output determination in an open economy. The model presented is

similar in spirit to the classic Mundell-Fleming model, but the discussion goes beyond

the standard presentation in its contrast of the effects of temporary versus permanent

policies. The distinction between temporary and permanent policies allows for an analysis

of dynamic paths of adjustment rather than just comparative statics. This dynamic

analysis brings in the possibility of a

J

-curve response of the current account to currency

depreciation. The chapter concludes with a discussion of exchange-rate pass-through,

that is, the response of import prices to exchange rate movements.

The chapter begins with the development of an open-economy fixed-price model (an

online Appendix discusses the relationship between the

IS

-

LM

model and the analysis in

this chapter). An aggregate demand function is derived using a Keynesian-cross diagram

in which the real exchange rate serves as a shift parameter. A nominal currency

depreciation increases output by stimulating exports and reducing imports, given foreign

and domestic prices, fiscal policy, and investment levels. This yields a positively sloped

output-market equilibrium (

DD

) schedule in exchange rate-output space. A negatively

sloped asset-market equilibrium (

AA

) schedule completes the model. The derivation of

this schedule follows from the analysis of previous chapters. For students who have

already taken intermediate macroeconomics, you may want to point out that the

intuition behind the slope of the

AA

curve is identical to that of the

LM

curve, with the

Chapter 16

Output and the Exchange Rate in the Short Run

79

additional relationship of interest parity providing the link between the closed-economy

LM

curve and the open-economy

AA

curve. As with the

LM

curve, higher income

increases money demand and raises the home-currency interest rate (given real balances).

In an open economy, higher interest rates require currency appreciation to satisfy interest

parity (for a given future expected exchange rate).

The effects of temporary policies as well as the short-run and long-run effects of

permanent policies can be studied in the context of the

DD

-

AA

model if we identify the

expected future exchange rate with the long-run exchange rate examined in Chapters 14

and 15. In line with this interpretation, temporary policies are defined to be those which

leave the expected exchange rate unchanged, while permanent policies are those which

move the expected exchange rate to its new long-run level. As in the analysis in earlier

chapters, in the long-run, prices change to clear markets (if necessary). While the

assumptions concerning the expectational effects of temporary and permanent policies

are unrealistic as an exact description of an economy, they are pedagogically useful

because they allow students to grasp how differing market expectations about the

duration of policies can alter their qualitative effects. Students may find the distinction

between temporary and permanent, on the one hand, and between short run and long

run, on the other, a bit confusing at first. It is probably worthwhile to spend a few

minutes discussing this topic.

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International Economics: Theory and Policy,

Eighth Edition

Both temporary and permanent increases in money supply expand output in the short run

through exchange rate depreciation. The long-run analysis of a permanent monetary

change once again shows how the well-known Dornbusch overshooting result can occur.

Temporary expansionary fiscal policy raises output in the short run and causes the

exchange rate to appreciate. Permanent fiscal expansion, however, has no effect on

output even in the short run. The reason for this is that, given the assumptions of the

model, the currency appreciation in response to permanent fiscal expansion completely

“

crowds out

”

exports. This is a consequence of the effect of a permanent fiscal

expansion on the expected long-run exchange rate which shifts inward the asset-market

equilibrium curve. This model can be used to explain the consequences of U.S. fiscal and

monetary policy between 1979 and 1984. The model explains the recession of 1982 and

the appreciation of the dollar as a result of tight monetary and loose fiscal policy.

The chapter concludes with some discussion of real-world modifications of the basic

model. Recent experience casts doubt on a tight, unvarying relationship between

movements in the nominal exchange rate and shifts in competitiveness and thus

between nominal exchange rate movements and movements in the trade balance as

depicted in the

DD

-

AA

model. Exchange-rate pass-through is less than complete and

thus nominal exchange rate movements are not translated one-for-one into changes in

the real exchange rate. Also, the current account may worsen immediately after currency

depreciation. This

J

-curve effect occurs because of time lags in deliveries and because of

low elasticities of demand in the short run as compared to the long run. The chapter

contains a discussion of the way in which the analysis of the model would be affected by

the inclusion of incomplete exchange-rate pass-through and time-varying elasticities.

Appendix II provides further information on trade elasticities with a presentation of the

Marshall-Lerner conditions and a reporting of estimates of the impact, short-run and

long-run elasticities of demand for international trade in manufactured goods for a

number of countries.

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Answers to Textbook Problems

1.

A decline in investment demand decreases the level of aggregate demand for any

level of the exchange rate. Thus, a decline in investment demand causes the

DD

curve to shift to the left.

2.

A tariff is a tax on the consumption of imports. The demand for domestic goods, and

thus the level

of aggregate demand, will be higher for any level of the exchange rate. This is

depicted in Figure 16.1 as a rightward shift in the output market schedule from

DD

to

D

?

D

?

. If the tariff is temporary, this

is the only effect, and output will rise even though the exchange rate appreciates as

the economy

moves from Points 0 to 1. If the tariff is permanent, however, the long-run expected

exchange rate appreciates, so the asset market schedule shifts to

A

?

A

?

. The

appreciation of the currency is sharper

in this case. If output is initially at full employment, then there is no change in output

due to a permanent tariff.

Chapter 16

Output and the Exchange Rate in the Short Run

81

Figure 16.1

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International Economics: Theory and Policy,

Eighth Edition

3.

A temporary fiscal policy shift affects employment and output, even if the

government maintains a balanced budget. An intuitive explanation for this relies

upon the different propensities to consume

of the government and of taxpayers. If the government spends $$1 more and finances

this spending

by taxing the public $$1 more, aggregate demand will have risen because the

government spends the entire $$1, while the public reduces its spending by less than

$$1 (choosing to reduce its saving as well as its consumption). The ultimate effect on

aggregate demand is even larger than this first round difference between

government and public spending propensities, since the first round generates

subsequent spending. (Of course, currency appreciation still prevents permanent

fiscal shifts from affecting output in our model.)

4.

A permanent fall in private aggregate demand causes the

DD

curve to shift inward

and to the left and, because the expected future exchange rate depreciates, the

AA

curve shifts outward and to the right. These two shifts result in no effect on output,

however, for the same reason that a permanent fiscal expansion has no effect on

output. The net effect is a depreciation in the nominal exchange rate and, because

prices will not change, a corresponding real exchange rate depreciation. A

macroeconomic policy response to this event would not be warranted.

5.

Figure 16.2 can be used to show that any permanent fiscal expansion worsens the

current account.

In this diagram, the schedule

XX

represents combinations of the exchange rate and

income for which the current account is in balance. Points above and to the left of

XX

represent current account surplus, and points below and to the right represent

current account deficit. A permanent fiscal expansion shifts the

DD

curve to

D

?

D

?

and,

because of the effect on the long-run exchange rate, the

AA

curve shifts to

A

?

A

?

. The

equilibrium point moves from 0, where the current account is in balance, to 1, where

there is a current account deficit. If, instead, there was a temporary fiscal expansion

of the same size, the

AA

curve would not shift and the new equilibrium would be at

Point 2 where there is a current account deficit, although it is smaller than the

current account deficit at Point 1. Thus, a temporary increase in government

spending causes the current account to decline by less than a permanent increase

because there is no change in expectations with a temporary shock and thus the

AA

curve does not move.

Chapter 16

Output and the Exchange Rate in the Short Run

83

Figure 16.2