International Macroeconomics
This new text provides a systematic and comprehensive international treatment of the asset approach to the exchange rate and the current account of the balance of payments. It includes an analysis of macroeconomic adjustments under fixed, floating and man
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INTERNATIONAL MACROECONOMICS Emmanuel Pikoulakis with contributions from
Frederick van der Ploeg and
Ronald MacDonald
© Emmanuel Pikoulakis 1995
All rights reserved. No reproduction, copy or transmission of this publication may be made without written permission. No paragraph of this publication may be reproduced, copied or transmitted save with written permission or in accordance with the provisions of the Copyright, Designs and Patents Act 1988, or under the terms of any licence permitting limited copying issued by the Copyright Licensing Agency, 90 Tottenham Court Road, London WIP 9HE. Any person who does any unauthorised act in relation to this publication may be liable to criminal prosecution and civil claims to damages. First published 1995 by MACMILLAN PRESS LTD Houndmills, Basingstoke, Hampshire RG21 2XS and London Companies and representatives throughout the world
ISBN 978-1-349-24295-5 (eBook) ISBN 978-0-333-59896-2 DOI 10.1007/978-1-349-24295-5 A catalogue record for this book is available from the British Library. 10 9 04 03
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To the memory of my parents
Contents x
List o/Tables and Figures Acknowledgements
xiii
Introduction 1
1
Approaches to the Balance of Payments and the Exchange Rate: The Case of Capital Immobility 1.1 Introduction 1.2 The accounting framework of the balance of payments 1.3 The elasticities approach to the balance of payments and the exchange rate 1.4 The absorption approach to the balance of payments and the exchange rate 1.5 The monetary approach to the balance of payments and the exchange rate
2
3
The Asset Approach to the Exchange Rate: Monetary Models of the Exchange Rate 2.1 Introduction
5 5
6 9 13 24
32 32
2.2 Monetary models of the exchange rate: the case of flexible prices 2.3 Monetary models of the exchange rate: full employment and sticky prices 2.4 Monetary models of the exchange rate: demand-determined outputs and sticky prices 2.5 Concluding remarks
49 58
The Asset Approach to the Exchange Rate: Portfolio Balance Models of the Exchange Rate and the Current Account 3.1 Introduction 3.2 A mean-variance analysis of portfolio choice
60 60 61
3.3 Monetary policy, expectations and the exchange rate 3.4 Monetary policy and the degree of asset substitution
vii
33 39
63 71
viii
Contents 3.5 The exchange rate, the current account and expectations 3.6 Responses of the exchange rate and the current account to sterilised and non-sterilised, unanticipated, open-market operations 3.7 Concluding remarks
4
5
6
7
Exchange Rates, Expectations and the Current Account 4.1 Introduction 4.2 A description of the model: setting the agenda 4.3 Short-run equilibrium responses under exogenous expectations 4.4 Impact, dynamic and steady-state adjustments under static expectations 4.5 The nominal exchange rate and the current account under perfect foresight 4.6 Concluding remarks The Cost of Disinflation in a Floating Exchange Rate Regime 5.1 Introduction 5.2 The basic Buiter-Miller model 5.3 The cost of disinflation w
