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International finance third edition

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Описание

Brief Contents

Part 1 The Balance of Payments and Macroeconomic Policy in an Open Economy

1 The Foreign Exchange Market 3

2 The Balance of Payments 27

3 Elasticity and Absorption Approaches to the Balance of Payments 52

4 Macroeconomic Policy in an Open Economy 69

5 The Monetary Approach to the Balance of Payments 98

Part 2 Exchange Rate Determination: Theory, Evidence and Policy

6 Purchasing Power Parity and Floating Exchange Rate Experience 125

7 Modern Models of Exchange Rate Determination 147

8 The Portfolio Balance Model 178

9 Empirical Evidence on Exchange Rates 202

10 Fixed, Floating and Managed Exchange Rates 235

Part 3 The Postwar International Monetary System

11 The International Monetary System 261

12 The Eurocurrency and Eurobond Markets 304

13 Currency Derivatives: Futures, Options and Swaps 323

14 International Macroeconomic Policy Coordination 358

15 The International Debt Crisis 377

16 Economic and Monetary Union in Europe 409

17 Currency Crises and the East Asian Financial Crisis 450

Contents

List of Tables xiv

List of Figures xvii

List of Boxes xix

Acknowledgements xx

Introduction xxi

PART 1 THE BALANCE OF PAYMENTS AND MACROECONOMIC POLICY IN AN OPEN ECONOMY

1 The Foreign Exchange Market 3

1.1 Introduction 3

1.2 Exchange rate definitions 5

1.3 Characteristics and participants of the foreign exchange market 6

1.4 Arbitrage in the foreign exchange market 8

1.5 The spot and forward exchange rates 9

1.6 Nominal, real and effective exchange rates 9

1.7 A simple model of the determination of the spot exchange rate 13

1.8 Alternative exchange rate regimes 17

1.9 The determination of the forward exchange rate 20

1.10 The interaction of hedgers, arbitrageurs and speculators 24

1.11 Conclusions 25

2 The Balance of Payments 27

2.1 Introduction 27

2.2 What is the balance of payments? 28

2.3 Collection, reporting and presentation of the balance of payments

statistics 28

2.4 Balance of payments accounting and accounts 29

2.5 An overview of the sub-accounts in the balance of payments 30

2.6 Recording of transactions in the balance of payments 32

2.7 What is meant by a balance of payments surplus or deficit? 34

2.8 Alternative concepts of surplus and deficit 34

2.9 Do the record United States current account deficits matter? 36

2.10 Some open economy identities. 42

2.11 Open economy multipliers 45

2.12 Conclusions 50

3 Elasticity and Absorption Approaches to the Balance of Payments 52

3.1 Introduction 52

3.2 The elasticity approach to the balance of payments 53

3.7 The effects of a devaluation on direct absorption 63

3.8 A synthesis of the elasticity and absorption approaches 66

3.9 Conclusions 66

4 Macroeconomic Policy in an Open Economy 69

4.1 Introduction 69

4.2 The problem of internal and external balance 70

4.3 The Mundell-Fleming model 72

4.4 Derivation of the IS schedule for an open economy 73

4.5 Derivation of the LM schedule for an open economy 75

4.6 Derivation of the BP schedule for an open economy 76

4.7 Equilibrium of the model 79

4.8 Factors shifting the IS-LM-BP schedules 79

4.9 Internal and external balance 81

4.10 Internal and external balance under fixed exchange rates 84

4.11 Internal and external balance under floating exchange rates 85

4.12 A small open economy with perfect capital mobility 87

4.13 The principle of effective market classification 92

4.14 Limitations of the Mundell-Fleming model 95

4.15 Conclusions 96

5 The Monetary Approach to the Balance of Payments 98

5.1 Introduction 98

5.2 A simple monetary model 99

5.3 The monetarist concept of a balance of payments disequilibrium 104

5.4 The effects of a devaluation 105

5.5 A monetary exchange rate equation 106

5.6 A money supply expansion under fixed exchange rates 108

5.7 A money supply expansion under floating exchange rates 110

5.8 The effects of an increase in income under fixed exchange rates 112

5.9 The effects of an increase in income under floating exchange rates 114

5.10 An increase in foreign prices under fixed exchange rates 115

5.11 An increase in foreign prices under floating exchange rates 116

5.12 Implications of the monetary approach 118

5.13 Empirical evidence on the monetary approach 119

5.14 Criticisms of the monetary approach 120

5.15 Conclusions 121

PART 2 EXCHANGE RATE DETERMINATION: THEORY, EVIDENCE

AND POLICY

6 Purchasing Power Parity and Floating Exchange Rate Experience 125

6.1 Introduction 125

6.2 Purchasing power parity theory and the law of one price 126

6.3 Absolute and relative PPP 126

6.4 A generalized version of PPP 128

6.5 Measurement problems in testing for PPP 129

6.6 Empirical evidence on PPP 130

6.7 Summary of empirical evidence on PPP 135

6.8 Explaining the poor performance of purchasing power parity

theory 139

6.9 The Balassa-Samuelson model 141

6.10 Per capita income levels, the relative sizes of economies and the

importance of PPP estimates 143

6.11 Conclusions 145

7 Modem Models of Exchange Rate Determination 147

7.1 Introduction 147

7.2 Asset prices 148

7.3 Uncovered interest rate parity 149

7.4 The monetary models of exchange rate determination 152

7.5 The flexible-price monetary model 152

7.6 The Dornbusch sticky-price monetarist model 154

7.7 A simple explanation of the Dornbusch model 155

7.8 A formal explanation of the Dornbusch model 157

- 7.9 Derivation of the goods-market equilibrium schedule 158

7.10 Derivation of the money-market equilibrium schedule 159

7.11 A money supply expansion and exchange rate 'overshooting' 162

7.12 Importance of the sticky-price monetary model 163

7.13 The Frankel real interest rate differential model 164

7.14 Implications of the monetary views of exchange rate determination 166

7.15 Allowing for imperfect substitutability between domestic and

foreign bonds 169

7.16 A synthesis portfolio balance model 172

7.17 The importance of the portfolio balance model 174

7.18 Conclusions 175

8 The Portfolio Balance Model 178

8.1 Introduction 178

8.2 The concept of a risk premium 179

8.3 Different types of risk 181

8.4 A portfolio balance model 183

8.5 Derivation of the asset demand functions 186

8.6 Equilibrium of the model 187

8.7 The effects of a foreign exchange operation 188

8.8 The effects of an open market operation 189

8.9 The effects of a sterilized foreign exchange operation 190

8.10 A comparison of an FXO, OMO and SFXO 192

8.11 The dynamics of the model 193

8.12 The effects of a change in risk perceptions 194

8.13 Money versus bond-financed fiscal expansion 195

8.14 The risk premium, imperfect and perfect substitutability 198

8.15 Conclusions 200

9 Empirical Evidence on Exchange Rates 202

9.1 Introduction 202

9.2 What is an efficient market? 203

9.3 Exchange market efficiency tests 204

9.4 Alternative tests of the efficient market hypothesis 209

9.5 Summary of findings on exchange market efficiency 210

9.6 Empirical tests of exchange rate models 211

9.7 Exchange rate models: a forecasting analysis 213

9.8 Explaining the poor results of exchange rate models 216

9.9 The 'news' approach to modelling exchange rates 218

9.10 The longer-run predictability of exchange rate movements 221

9.11 Modelling exchange rate expectations 225

9.12 Empirical tests of different expectations mechanisms 227

9.13 Alternative approaches to modelling exchange rates: the role of

chartists and fundamentalists 228

9.14 Conclusions 230

10 Fixed, Floating and Managed Exchange Rates 235

10.1 Introduction 235

10.2 The case for fixed exchange rates 236

10.3 The case for floating exchange rates 238

10.4 The modern evaluation of fixed and flexible exchange rate

regimes 242

10.5 Specification of the objective function 242

10.6 The model 243

10.7 Determining equilibrium 245

10.8 Money demand shock 247

10.9 Aggregate demand shock 248

10.10 Aggregate supply shock 249

10.11 Managed floating 252

10.12 Conclusions 256

PART 3 THE POSTWAR INTERNATIONAL MONETARY SYSTEM

11 The International Monetary System 261

11.1 Introduction 261

11.2 The Bretton Woods system 263

11.3 Features of the system 263

11.4 A brief history of the Bretton Woods system 265

11.5 Why did the Bretton Woods system break down? 268

11.6 The post-Bretton Woods era 273

11.7 The Jamaica Conference of 1976 277

11.8 The Snake and the EMS 278

11.9 The second oil shock 279

11.10 The dazzling dollar, 1980-85 279

11.11 From Plaza to Louvre and beyond 280

11.12 Currency turmoil and crises post-1990 281

11.13 The present exchange rate system 289

11.14 The bipolar view of the international monetary system:

which exchange rate regime is best? 289

11.15 Reform of the international monetary system 295

11.16 The Williamson target zone proposal 295

11.17 The McKinnon global monetary target proposal 295

11.18 The Tobin foreign exchange tax proposal 296

11.19 Reform of the international financial architecture 297

11.20 Conclusions 300

12 The Eurocurrency and Eurobond Markets 304

12.1 Introduction 304

12.2 Participants in the Eurocurrency and Eurobond markets 306

12.3 The origins and development of the Eurocurrency market 306

12.4 The characteristics of the Eurodollar market 308

12.5 The competitive advantage of Eurobanks 309

12.6 The coexistence of domestic and Eurobanking 310

12.7 The creation of Eurodollar deposits and loans 310

12.8 The pros and cons of the Eurocurrency markets 312

12.9 Euromarkets and government regulation and policy 313

12.10 The international capital market and the Eurobond market 314

12.11 The origins and development of the Eurobond market 314

12.12 Typical features of a Eurobond 315

12.13 Control and regulation of the Eurobond market 316

12.14 The management of a Eurobond issue 318

12.15 Innovations in the Eurobond market 320

12.16 Conclusions 320

13 Currency Derivatives: Futures, Options and Swaps 323

13.1 Introduction 323

13.2 The growth of derivative markets 324

13.3 Exchange-traded futures and options contracts 325

13.4 Currency futures and currency forwards 326

13.5 The use of currency futures for hedging purposes 328

13.6 The symmetry of profit/losses on futures/forward positions 330

13.7 The pricing of currency futures 331

13.8 Currency options 332

13.9 A currency option versus a forward contract for hedging 335

13.10 A currency option versus a forward for speculating 336

13.11 The pricing of currency options 339

13.12 Intrinsic value and time value 340

13.13 The distribution of the option premium between time and

intrinsic value 341

13.14 The Garman and Kohlhagen option-pricing formula 346

13.15 A numerical example of the Garman-Kohlhagen formula 347

13.16 Problems with the currency option-pricing formula 349

13.17 The over-the-counter market in options 350

13.18 The swaps market 350

13.19 Potential currency swap scenarios 351

13.20 A currency swap agreement 352