1 / 13

Forex

Forex. Economics 285 Fall 2000. Exchange rates. Current rate is ¥107 per US dollar Depreciation of yen means more ¥ per $ At ¥107, an item costing ¥107,000 is US$1,000 At ¥214 that item costs only US$500 Appreciation means fewer ¥ per $ In the mid-1980s, the rate was ¥240

keelia
Download Presentation

Forex

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Forex Economics 285 Fall 2000

  2. Exchange rates • Current rate is ¥107 per US dollar • Depreciation of yen means more ¥ per $ • At ¥107, an item costing ¥107,000 is US$1,000 • At ¥214 that item costs only US$500 • Appreciation means fewer ¥ per $ • In the mid-1980s, the rate was ¥240 • The yen peaked at ¥80 in 1995

  3. Impact of ¥ appreciation • Query: what happens to Nissan’s exports? • What brand TVs do Japanese buy? • What happens to GDP? • Y = C + I + G + X - M • What happens to Japanese life insurers who bought US Treasuries & real estate? • ¥240 x $50 bil = ¥12 trillion becomes ¥4 trillion

  4. Pegs • Fixed exchange rates • Trade dollars (baht) at a fixed rate (B22.0=$1) • Choice of pegs • Single currency (e.g., US$) • Basket (e.g., by % of trade against ¥, $, E) • Government must be able to control • Supply dollars to meet demand or • Make holding baht more attractive to attract dollars / shift S&D • If the rate is really fixed, where do you borrow? • Query: can you have an independent monetary policy?

  5. Dynamics • Under a fixed rate • What happens with inflation? • Example: Prices double B22 per shirt to B44 • How does the price change in US$? • What happens to exports? Imports? • What happens to reserves?

  6. Exchange rate pressure • How keep from running out of reserves • Raise interest rates? • Slow domestic demand? • Supply more dollars? • Requires being able to borrow dollars • But who will loan? • The IMF!!

  7. Thailand • In July 1997 the Thai Baht fell 50% • What happens to the number of baht a Thai bank would need to repay a US$ loan? • Thai banks were rendered insolvent in one night! • So should they use a crawling peg? • Adjust for inflation? • Adjust for shifts in ¥/$ rate, since Japan is a major market

  8. Japan’s case • Under the Dodge Plan, the yen was fixed in 1949 at ¥360 = $1 • Modest inflation and rapid growth produced chronic trade deficits • When Japan began running out of US$ they slowed domestic demand rather than depreciating their currency • The tool? - raise interest rates!

  9. But raise interest rates? • Yes, because capital controls didn’t let people freely buy / sell yen • So in the 1997 currency crisis, Malaysia imposed capital controls and avoided the full brunt of the crisis

  10. How to use a hedge fund • When you see a country in trouble: • Borrow lots of baht • Use it to buy US$ • Wait! • If you’re lucky • The exchange rate collapses • You buy back baht on the cheap • Overnight profit • $100 mil gives $50 mil profit

  11. Liberalization • However for Japan accession to the OECD in 1964 required that they gradually remove capital controls • Process largely completed in 1980 • Residual controls remained until 1998 • 34 years, start to finish! • But what happened to the yen?

  12. Response to US inflation • Bretton Woods collapsed in 1971 • ¥360 to ¥308 • How respond? • Lower interest rates • Increase fiscal expenditures • Tanaka Kakuei’s Rebuilding the Japanese Archipelago • Don’t “sterilize”

  13. Bottom line • Double-digit inflation in mid-1973 • Then the oil crisis hit! • Deep doo-doo

More Related