Version actuelle datée du 23 avril 2020 à 14:05

Floating exchange rates

Données clés
Professeur(s)	Sbergami, Federica^[1]^[2]^[3] Céline Carrère^[4]^[5]^[6]^[7]^[8]^[9]
Cours	International Economy

Lectures

What is the impact of macroeconomic policies (↑ $G$ or ↑ $M$ ) under a floating exchange rate regime?

Does a temporary shock ( $\Delta ^{E}e=0$ ) have the same effect on the exchange rate as a permanent shock ( $\Delta E^{e}\neq 0$ )?

Can the evolution of the US current account be explained on the basis of the full model (DD-AA)?

Application of the DD-AA model to analyse the effects of fiscal and monetary policies.

Two possible situations :

Floating exchange rates (this chapter)
Fixed exchange rates (next chapter)

We start from a long-term situation where $Y=Y_{PE}$ , $R=R^{*}$ .

We consider an expansionary shock (↑ of $G$ or $M$ ). Distinction between:

Temporary shock $\equiv$ doesn't change currency expectations (\Delta E^e = 0</math>).

Permanent shock $\equiv$ modifies exchange rate expectations ( $\Delta E^{e}\neq 0$ ); in this case we also distinguish short-term effects ( $\Delta P=0$ ) from long-term effects ( $\Delta P\neq 0$ ).

Languages

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Floating exchange rates[modifier | modifier le wikicode]

Most developed countries adopt a floating exchange rate regime = the government does not systematically intervene to try to maintain a parity against a base currency → continuous fluctuations.

Source: Feenstra&Taylor, 2008

Case Swiss franc (CHF) - euro (EUR)

Source: Pacific Exchange Rate Service^[10]

Model DD-AA: Temporary shocks[modifier | modifier le wikicode]

Politique budgétaire expansive[modifier | modifier le wikicode]

Temporary shocks => $\Delta E^{e}=0$

$G$ ↗ => DD to the right => $E_{1}$ given, ED of goods and services => $Y$ ↗ =>Currency ED => $R$ ↗ => ED of national currency => $E$ ↘ (ds movement along AA). This until equilibrium is restored in all markets at the point $2$ (but with a CA↘ through an appreciation of the national currency).

Expansionary monetary policy[modifier | modifier le wikicode]

Chocs temporaires => $\Delta E^{e}=0$

$M$ ↗ => AA to the right => to $Y=Y_{1}$ , $ES_{M}$ -> $R$ ↘ => $ED_{\$}$ -> $E$ ↗ = feedback on A’A’ (immediate adaptation), but with CA higher than initially => $ED_{BS}>0$ => $Y$ ↗ => gradual transition from the point $2$ to the point $3$ (= partial compensation for the initial depreciation of the national currency).

Finally, at the point $3$ the AC improved through the depreciation of the national currency.

Policy of maintaining full employment[modifier | modifier le wikicode]

Initially $Y_{1}=Y_{PE}$

Temporary negative shock : $D_{1}D_{1}$ ⟶ $D_{2}D_{2}$ => 1 ⟶ 2 et $Y_{2}<Y_{PE}$

How to restore $Y=Y_{PE}$ ? Either by:

Monetary expansion ( $A_{1}A_{1}$ ⟶ $A_{2}A_{2}$ )
Fiscal expansion ( $D_{2}D_{2}$ ⟶ $D_{1}D_{1}$ )

Or: combining monetary and fiscal policy

NB1: Even if the effect of these two interventions on output is identical, monetary policy and fiscal policy are not equivalent in their impact on the exchange rate.

NB2: What interventions can be imagined to counteract the recessionary effect of a temporary increase in the demand for money?

Remarks on stabilization policies[modifier | modifier le wikicode]

The short-term impact of macroeconomic policies may not occur at the desired time (the problem of timing, which affects fiscal policy more strongly).

Increasing government deficit as a result of an expansive fiscal policy weighs on future generations.

Risk that macroeconomic policy may be recuperated for political purposes (expansive policy just before an election): the anticipation of such behaviour may lead to wage demands and price increases = inflationary bias (self-fulfilling expectations) which led to the independence of many central banks in the 1980s.

Model DD-AA: permanent shocks[modifier | modifier le wikicode]

Expansionary fiscal policy[modifier | modifier le wikicode]

The change in the expected exchange rate is based on the relationship : $E^{e}=(q)^{e}({\frac {P}{P^{*}}})$

As the level of $G$ has increased, agents anticipate, in the long term, a real appreciation of $\lambda$ % necessary to restore equilibrium in the goods and services market.

Anticipated nominal exchange rate appreciates (same proportion): ${\hat {E}}^{e}={\hat {q}}^{e}$ and the rise in domestic demand (due to ↑ $G$ ) is compensated by a ↓ pf CA.

AA moves downwards by a proportion $\lambda$ vertically to full employment income ( $Y_{1}=Y_{PE}$ by hypothesis): role of anticipations.

Simultaneous changes => one passes immediately from the point $1$ to the point $2$ .

Nominal appreciation of $\lambda$ % (greater than in the case of a temporary expansion: point $3$ which maintains the economy at its full employment level.

No impact on national income (not even in the short term). N.B.: Here $\Delta P=0$ ( $\Delta P\neq 0$ only with monetary shock).

Pexpansive monetary policy[modifier | modifier le wikicode]

Agents anticipate that, in the long term, an increase in the money supply of $\mu$ % will be reflected in the same proportion on $P$ and on $E$ : role of expectations.

In the short term:

$E^{e}$ ↑ de $\mu$ %, which moves AA upward in the same proportion (vertical to full employment income) -> $A'A'$ ( $1$ -> $2$ ).
Also, like $M$ ↑ => further movement of AA to the right -> $A''A''$ ( $2$ -> $3$ ).
In $3$ : $ED_{BS}>0$ -> $E$ ↓ => $ED_{BS}$ ↓ ( $3$ -> $4$ ).

=> impact on $Y$ (↑) even more pronounced than if the shock is temporary (point $5$ ).

Gradual price adjustment

As $Y>Y_{PE}$ and $M$ has risen, prices gradually increase until the economy returns to full employment ( $P_{1}\rightarrow P_{2}$ ) or ( $4\rightarrow 2$ ).

= DD and AA curves move left until they intersect vertically from $Y_{1}$ (full employment) to the point $2$ .

=> No real long-term consequences ( $M$ , $E$ and $P$ all increase in the same proportion):

{\hat {M}}={\hat {E}}={\hat {P}}=\mu

Exchange rate overshooting

Summary: Floating exchange rates[modifier | modifier le wikicode]

IS-LM model with floating exchange[modifier | modifier le wikicode]

Equilibrium[modifier | modifier le wikicode]

NB: the IS-LM model is a short-term model which is not adapted to capture the long-term effects of an economic policy => in the following we will analyse only the impacts of temporary policies (cf. FT, ch7).

Currency budget shock[modifier | modifier le wikicode]

Temporary budget shock[modifier | modifier le wikicode]

Case Study: The United States Current Account[modifier | modifier le wikicode]

US current account 1976-2004[modifier | modifier le wikicode]

Over the whole period, the real exchange rate and the US current account balance seem to follow a cyclical pattern. = the dollar really appreciates before 1985 and before 2002 (NB: in this graph a rise in the real exchange rate indicates a real appreciation of the dollar), while CA follows the opposite trend.

Can the DD-AA model (KO, ch.17) explain these developments?

Explanation[modifier | modifier le wikicode]

DD-AA model and expansive fiscal policy: as just seen above, under the DD-AA model an expansive fiscal policy leads to a real appreciation of the national currency and a current account deficit. This works well with the early 1980s and early 2000s: the two governments involved (Reagan or Bush junior) both reduced taxes and increased military spending.

What causes the pendulum to swing back?

Suggested KO: wealth effect (not formally incorporated in the DD-AA model) = as the current account deficit widens, the wealth of residents falls relative to that of non-residents (see chapter 10). Since there is a national preference, this should lead to a decline in the relative demand for domestic products, and thus to a real depreciation of the national currency. If the latter is correctly anticipated by agents, this immediately generates a depreciation of the national currency, which gradually corrects the current account deficit.

Puzzles[modifier | modifier le wikicode]

1. As soon as it noticed a fall in industrial production following the crisis caused by the 2000-2001 financial bubble (new technologies), the FED lowered interest rates to mitigate the effects of the recession = expansive monetary policy, which should have led, according to our DD-AA approach, to a depreciation of the dollar. However, the USD continued to appreciate until 2002. Why did it do so? Possible explanation: anticipation of future appreciation of the US currency based on two elements:

Bush, narrowly elected, announces tax cuts = expansive fiscal policy.
The 9/11 attacks would certainly call for an expansive fiscal policy.

2. From 2002 onwards the US dollar started to depreciate considerably. In spite of this, the trade balance continues to remain heavily in deficit and there is no evidence of improvement. Why?

Possible explanation: US domestic consumption too high and savings too low in relation to investments → strong international imbalances (see end of chapter 10).

Conclusion: One must remain cautious in the analysis. There are enough exogenous variables in the model to make it consistent with virtually all macroeconomic developments!

Annexes[modifier | modifier le wikicode]

References[modifier | modifier le wikicode]

[1] Page personnelle de Federica Sbergami sur le site de l'Université de Genève

[2] Page personnelle de Federica Sbergami sur le site de l'Université de Neuchâtel

[3] Page personnelle de Federica Sbergami sur Research Gate

[4] Céline Carrère - Faculté d'économie et de management - UNIGE

[5] Céline Carrère - Google Scholar Citations

[6] Director Céline Carrère - Rectorat - UNIGE

[7] Céline Carrère | Sciences Po - Le Laboratoire Interdisciplinaire d'Evaluation des Politiques Publiques (LIEPP)

[8] Céline Carrere - EconPapers

[9] Céline Carrère's research works - ResearchGate

[10] ttp://fx.sauder.ubc.ca/data.html

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   | image =
   | image_caption =
-  | cours = [[Economie Internationale]]
+  | cours = [[International Economy]]
   | faculté =
   | département =
@@ Ligne 10 : / Ligne 10 : @@
   | enregistrement =
   | lectures =
-* [[Le modèle de Ricardo : différences de productivité comme déterminant du commerce]]
+* [[Ricardo's model: productivity differences as a determinant of trade]]
-* [[Le modèle Heckscher-Ohlin : différences de dotations en facteurs de production comme déterminant du commerce]]
+* [[The Heckscher-Ohlin model: differences in factor endowments as a determinant of trade]]
-* [[Les économies d’échelle comme déterminant du commerce : au-delà de l’avantage comparatif]]
+* [[Economies of scale as a determinant of trade: beyond comparative advantage]]
-* [[Instruments de politique commerciale]]
+* [[Trade policy instruments]]
-* [[Les accords multilatéraux]]
+* [[Multilateral trade agreements]]
-* [[Les Accords de commerce préférentiel]]
+* [[Preferential Trade Agreements]]
-* [[La Contestation du libre-échange]]
+* [[The Free Trade Challenge]]
-* [[Macroéconomie Internationale : enjeux et tour d'horizon]]
+* [[International Macroeconomics: Issues and Overview]]
-* [[Comptes nationaux et balance des paiements]]
+* [[National Accounts and Balance of Payments]]
-* [[Les taux de change et le marché des changes]]
+* [[Exchange rates and the foreign exchange market]]
-* [[Taux de change à court terme : l’approche par les actifs]]
+* [[Short-term exchange rates: the asset-based approach]]
-* [[Taux de change à long-terme : l’approche monétaire]]
+* [[Long-term exchange rates: the monetary approach]]
-* [[Produit intérieur et taux de change à court terme]]
+* [[Domestic product and short-term exchange rates]]
-* [[Taux de change flottants]]
+* [[Floating exchange rates]]
-* [[Taux de change fixes et interventions sur le marché des changes]]
+* [[Fixed exchange rates and intervention on the foreign exchange market]]
 }}
@@ Ligne 49 : / Ligne 49 : @@
 {{Translations
 | fr = Taux de change flottants
-| es =
+| es = Tipos de cambio flotantes
 }}
@@ Ligne 107 : / Ligne 107 : @@
 Risk that macroeconomic policy may be recuperated for political purposes (expansive policy just before an election): the anticipation of such behaviour may lead to wage demands and price increases = inflationary bias (self-fulfilling expectations) which led to the independence of many central banks in the 1980s.
-= Modèle DD-AA : chocs permanents =
+= Model DD-AA: permanent shocks =
-== Politique budgétaire expansive ==
+== Expansionary fiscal policy ==
-La modification du taux de change anticipé se fait selon la relation : <math>E^e = (q)^e(\frac {P}{P^*})</math>
+The change in the expected exchange rate is based on the relationship : <math>E^e = (q)^e(\frac {P}{P^*})</math>
 [[File:économie internationale politique modèle DD-AA politique budgétaire expansive 1.png|thumb|center|]]
-Comme le niveau de <math>G</math> a augmenté, les agents anticipent, à long terme, une appréciation réelle de <math>\lambda</math>% nécessaire pour rétablir l'équilibre sur le marché des biens et services.
+As the level of <math>G</math> has increased, agents anticipate, in the long term, a real appreciation of <math>\lambda</math>% necessary to restore equilibrium in the goods and services market.
-Taux de change nominal anticipé s'apprécie (même proportion) : <math>\hat {E}^e = \hat {q}^e</math> et la hausse de la demande interne (due à ↑<math>G</math>) est compensée par une ↓ de CA.
+Anticipated nominal exchange rate appreciates (same proportion): <math>\hat {E}^e = \hat {q}^e</math> and the rise in domestic demand (due to ↑<math>G</math>) is compensated by a ↓ pf CA.
-AA se déplace vers le bas d'une proportion <math>\lambda</math> à la verticale du revenu de plein emploi (<math>Y_1 = Y_{PE}</math> par hypothèse) : rôle des anticipations.
+AA moves downwards by a proportion <math>\lambda</math> vertically to full employment income (<math>Y_1 = Y_{PE}</math> by hypothesis): role of anticipations.
-Changements simultanés => on passe immédiatement du point <math>1</math> au point <math>2</math>.
+Simultaneous changes => one passes immediately from the point <math>1</math> to the point <math>2</math>.
-Appréciation nominale de <math>\lambda</math>% (plus grande que dans le cas d’une expansion temporaire : point <math>3</math> qui maintient l'économie à son niveau de plein emploi.
+Nominal appreciation of <math>\lambda</math>% (greater than in the case of a temporary expansion: point <math>3</math> which maintains the economy at its full employment level.
 [[File:économie internationale politique modèle DD-AA politique budgétaire expansive 2.png|thumb|center|]]
-Aucun impact sur le revenu national (même pas dans le court terme). N.B.: Ici <math>\Delta P = 0</math> (<math>\Delta P \neq 0</math> seulement avec choc monétaire).
+No impact on national income (not even in the short term). N.B.: Here <math>\Delta P = 0</math> (<math>\Delta P \neq 0</math> only with monetary shock).
-== Politique monétaire expansive ==
+== Pexpansive monetary policy ==
-Les agents anticipent qu'à long terme une hausse de la masse monétaire de <math>\mu</math>% se répercutera dans la même proportion sur <math>P</math> et sur <math>E</math> : rôle des anticipations.
+Agents anticipate that, in the long term, an increase in the money supply of <math>\mu</math>% will be reflected in the same proportion on <math>P</math> and on <math>E</math>: role of expectations.
 [[File:économie internationale politique modèle DD-AA politique monétaire expansive 1.png|thumb|center|]]
-À court terme:
+In the short term:
-*<math>E^e</math>↑ de <math>\mu</math>%, ce qui déplace AA vers le haut dans la même proportion (à la verticale du revenu de plein emploi) -> <math>A'A'</math> (<math>1</math> -> <math>2</math>).
+*<math>E^e</math>↑ de <math>\mu</math>%, which moves AA upward in the same proportion (vertical to full employment income) -> <math>A'A'</math> (<math>1</math> -> <math>2</math>).
-*De plus, comme <math>M</math>↑ => déplacement supplémentaire de AA vers la droite -> <math>A''A''</math> (<math>2</math> -> <math>3</math>).
+*Also, like <math>M</math>↑ => further movement of AA to the right -> <math>A''A''</math> (<math>2</math> -> <math>3</math>).
-*En <math>3</math> : <math>ED_{BS} > 0</math> -> <math>E</math>↓ => <math>ED_{BS}</math>↓ (<math>3</math> -> <math>4</math>).
+*In <math>3</math> : <math>ED_{BS} > 0</math> -> <math>E</math>↓ => <math>ED_{BS}</math>↓ (<math>3</math> -> <math>4</math>).
-=> impact sur <math>Y</math> (↑) encore plus prononcé que si le choc est temporaire (point <math>5</math>).
+=> impact on <math>Y</math> (↑) even more pronounced than if the shock is temporary (point <math>5</math>).
 [[File:économie internationale politique modèle DD-AA politique monétaire expansive 2.png|thumb|center|]]
-Ajustement progressif des prix
+Gradual price adjustment
-Comme <math>Y > Y_{PE}</math> et que <math>M</math> a augmenté, les prix augmentent progressivement jusqu'à ce que l'économie retourne à son niveau de plein emploi (<math>P_1 \rightarrow P_2</math>) ou (<math>4 \rightarrow 2</math>).
+As <math>Y > Y_{PE}</math> and <math>M</math> has risen, prices gradually increase until the economy returns to full employment (<math>P_1 \rightarrow P_2</math>) or (<math>4 \rightarrow 2</math>).
-= les courbes DD et AA se déplacent vers la gauche jusqu'à ce qu'elles se croisent à la verticale de <math>Y_1</math>  (plein-emploi) au point <math> 2</math> .
+= DD and AA curves move left until they intersect vertically from <math>Y_1</math> (full employment) to the point <math>2</math> .
-=> Aucune conséquence réelle à long terme (<math>M</math> , <math>E</math>  et <math>P</math>  augmentent tous dans la même proportion):
+=> No real long-term consequences (<math>M</math> , <math>E</math>  and <math>P</math>  all increase in the same proportion):
 :::::<math>\hat{M} = \hat{E} = \hat{P} = \mu</math>
-Overshooting du taux de change
+Exchange rate overshooting
-== Résumé : changes flottants ==
+== Summary: Floating exchange rates ==
 [[File:économie internationale politique résumé changes flottants 1.png|thumb|center|]]
-= Modèle IS-LM avec changes flottants =
+= IS-LM model with floating exchange =
-== Equilibre ==
+== Equilibrium ==
 [[File:économie internationale IS-LM avec changes flottants équilibre 1.png|thumb|center|]]
-NB.: le [[L'approche keynésienne et le modèle IS-LM|modèle IS-LM]] est un modèle de court terme qui n'est pas adapté à capturer les effets de long période d'une politique économique => dans la suite nous allons analyser les seuls impacts de politiques temporaires (cf. FT, ch7).
+NB: the [[The Keynesian approach and the IS-LM model|IS-LM model]] is a short-term model which is not adapted to capture the long-term effects of an economic policy => in the following we will analyse only the impacts of temporary policies (cf. FT, ch7).
-== Choc budgétaire monétaire ==
+== Currency budget shock ==
 [[File:économie internationale IS-LM avec changes flottants choc monétaire temporaire 1.png|thumb|center|]]
-== Choc budgétaire temporaire ==
+== Temporary budget shock ==
 [[File:économie internationale IS-LM avec changes flottants choc budgétaire temporaire 2.png|thumb|center|]]
-= Etude de cas: le compte courant des États-Unis =
+= Case Study: The United States Current Account =
-== Compte courant des EU 1976-2004 ==
+== US current account 1976-2004 ==
-Sur l'ensemble de la période, on constate que le taux de change réel et le solde de la balance courante US semblent suivre une évolution cyclique
+Over the whole period, the real exchange rate and the US current account balance seem to follow a cyclical pattern.
-= le dollar s'apprécie réellement avant 1985 et avant 2002 (NB: dans ce graphique une hausse du taux de change réel indique une appréciation réelle du dollar), alors que CA suit l'évolution inverse.
+= the dollar really appreciates before 1985 and before 2002 (NB: in this graph a rise in the real exchange rate indicates a real appreciation of the dollar), while CA follows the opposite trend.
 [[File:économie internationale compte courant des États-Unis compte courant 1976-2004 1.png|thumb|center|]]
-Est-ce que le modèle DD-AA (KO, ch.17) peut expliquer ces évolutions ?
+Can the DD-AA model (KO, ch.17) explain these developments?
-== Explication ==
+== Explanation ==
-Modèle DD-AA et politique budgétaire expansive : comme on vient de le voir ci-dessus, selon le modèle DD-AA une politique budgétaire expansive provoque une appréciation réelle de la monnaie nationale et un déficit courant. Ceci marche bien avec le début des années 80 et le début des années 2000: les deux gouvernements incriminés (Reagan ou Bush junior) ont tout à la fois réduit les impôts et augmenté les dépenses militaires.
+DD-AA model and expansive fiscal policy: as just seen above, under the DD-AA model an expansive fiscal policy leads to a real appreciation of the national currency and a current account deficit. This works well with the early 1980s and early 2000s: the two governments involved (Reagan or Bush junior) both reduced taxes and increased military spending.
-Qu'est-ce qui provoque le retour de balancier ?
+What causes the pendulum to swing back?
-Suggestion du KO : effet de richesse (non incorporé formellement dans le modèle DD-AA) = au fur et à mesure que le déficit courant se creuse, la richesse des résidents baisse par rapport à celle des non-résidents (cf. chapitre 10). Or, comme il y a préférence nationale, cela doit conduire à une baisse de la demande relative de produits nationaux, et donc à une dépréciation réelle de la monnaie nationale. Si celle-ci est anticipée correctement par les agents, cela génère immédiatement une dépréciation de la monnaie nationale, ce qui corrige progressivement le déficit courant.
+Suggested KO: wealth effect (not formally incorporated in the DD-AA model) = as the current account deficit widens, the wealth of residents falls relative to that of non-residents (see chapter 10). Since there is a national preference, this should lead to a decline in the relative demand for domestic products, and thus to a real depreciation of the national currency. If the latter is correctly anticipated by agents, this immediately generates a depreciation of the national currency, which gradually corrects the current account deficit.
 == Puzzles ==
-. Dès l'instant où elle a constaté une chute de la production industrielle suite à la crise causée par la bulle financière de 2000-2001 (nouvelles technologies), la FED a baissé les taux d’intérêt pour atténuer les effets de la récession = politique monétaire expansive, qui aurait dû conduire selon notre approche DD-AA à une dépréciation du dollar. Or le USD continua de s'apprécier jusqu'en 2002. Pourquoi?
+. As soon as it noticed a fall in industrial production following the crisis caused by the 2000-2001 financial bubble (new technologies), the FED lowered interest rates to mitigate the effects of the recession = expansive monetary policy, which should have led, according to our DD-AA approach, to a depreciation of the dollar. However, the USD continued to appreciate until 2002. Why did it do so?
-Explication possible: anticipation d’appréciation future de la monnaie USA basée sur deux éléments:
+Possible explanation: anticipation of future appreciation of the US currency based on two elements:
-#Bush, étroitement élu, annonce une baisse d’impôts = politique budgétaire expansive.
+#Bush, narrowly elected, announces tax cuts = expansive fiscal policy.
-#Les attentats du 9/11 demanderaient certainement une politique budgétaire expansive.
+#The 9/11 attacks would certainly call for an expansive fiscal policy.
-. A partir de 2002 le dollar américain a commencé à se déprécier considérablement. Malgré cela, le solde de la balance commerciale continue à rester fortement déficitaire et il n’y a aucune évidence d’amélioration. Pourquoi ?
+. From 2002 onwards the US dollar started to depreciate considerably. In spite of this, the trade balance continues to remain heavily in deficit and there is no evidence of improvement. Why?
-Explication possible: consommation interne des USA trop élevée et épargne trop faible par rapport aux investissement → forts déséquilibres à niveau international (cf. fin du chapitre 10).
+Possible explanation: US domestic consumption too high and savings too low in relation to investments → strong international imbalances (see end of chapter 10).
-Conclusion : il faut rester prudent dans l’analyse. Il y a assez de variables exogènes dans le modèle pour que celui-ci soit cohérent avec pratiquement tous les déroulements macroéconomiques !
+Conclusion: One must remain cautious in the analysis. There are enough exogenous variables in the model to make it consistent with virtually all macroeconomic developments!
 = Annexes =

« Floating exchange rates » : différence entre les versions