Transcription of Costas Arkolakis teaching fellow: Federico Esposito
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Costas Arkolakis teaching fellow: Federico Esposito
Exchange RatesCostas Arkolakisteaching fellow : Federico EspositoEconomics 407, YaleJanuary 2014 Outline De nitions: Nominal and Real Exchange Rate A Theory of Determination of the Real Exchange Rate Foreign Exchange Market Price Arbitrage: Purchasing Power parity Interest Rate Arbitrage: Uncovered and Covered Interest Rate parity Determination of the Nominal Exchange RateDe nitions: Nominal Exchange Rate (NER) Nominal Exchange Rateis the price of a foreign currency in terms ofthe home currency E$/e= exchange rate (in US terms, Dollars per Euro) Ee/$= exchange rate (in European terms, Euros per Dollar) Thus,E$/e=1/Ee/$ An increase inE$/emeans a dollar depreciation. If a currency can buy more (less) of another currency, we say it has beenappreciated (depreciated) "E$/eorEe/$#: dollar depreciation, euro appreciationNominal vs Real Exchange rates (RER) Real exchange rateis the Nominal Exchange rate times the inverse ofthe relative price levels Dollar pound real exchange ratee$/ =E$/ PUKPUS whereE$/ :dollar price of 1 pound,PUK: is the price level in UK,PUSprice level in US e$/ : the relative price of a consumption basket in the UK in terms ofconsumption in USUS dollar depreciation vs other Currencies Makes US residents relatively poorer Mak
Outline De–nitions: Nominal and Real Exchange Rate A Theory of Determination of the Real Exchange Rate Foreign Exchange Market Price Arbitrage: Purchasing Power Parity
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