Kinh tế vĩ mô - Mô hình is – lm - Bp

and IS-LM-BP in Floating Exchange Rate Context • The depreciation of domestic currency encourages export, thus moving the IS curve rightward. • The open economy equilibrate at E3. • In the open economy, the monetary policy is very effective. TS. PHAN THẾ CÔNG 1/4/2016 27 Fiscal Policy and IS-LM-BP in Fixed Exchange Rate Context Y r E1 LM1 IS1 BP IS2 Y1 r1 Y3 r3 E3 E2 Y2 r2 LM2 TS. PHAN THẾ CÔNG Fiscal Policy and IS-LM-BP in Fixed Exchange Rate Context • Suppose the government adopts an expansionary policy, the IS curve moves rightward. • At E2, the goods and money markets reach an equilibrium, but the foreign exchange market does not. There exists the BP surplus. As a result, the domestic currency appreciate. TS. PHAN THẾ CÔNG Fiscal Policy and IS-LM-BP in Fixed Exchange Rate Context Y r E1 LM1 IS1 BP IS2 Y1 r1 Y3 r3 E3 E2 Y2 r2 LM2 TS. PHAN THẾ CÔNG 1/4/2016 28 Fiscal Policy and IS-LM-BP in Fixed Exchange Rate Context • Since the rates between currencies should remain fixed, the central bank is obliged to buy foreign currencies. • The purchase of foreign currencies increases the supply of domestic currency, shifting the LM curve right. • Fiscal policies in the fixed exchanged foreign rate context are effective. TS. PHAN THẾ CÔNG Monetary Policy and IS-LM-BP in Fixed Exchange Rate Context Y r E1 LM1 IS BP Y1 r1 E2 Y2 r2 LM2 TS. PHAN THẾ CÔNG Monetary Policy and IS-LM-BP in Fixed Exchange Rate Context • If the central bank increases its money supply, the LM curve shifts right. • At E2, the goods and money market are of equilibrium, while the foreign exchange market isn’t, for there exists an BP deficit. • The strong demand for foreign currencies will lead to the depreciation of domestic currencies. TS. PHAN THẾ CÔNG 1/4/2016 29 Monetary Policy and IS-LM-BP in Fixed Exchange Rate Context Y r E1 LM1 IS BP Y1 r1 E2 Y2 r2 LM2 TS. PHAN THẾ CÔNG Monetary Policy and IS-LM-BP in Fixed Exchange Rate Context • To keep the fixed exchange rates constant, the central bank has to sell foreign currencies it holds as reserves. • The selling of foreign currencies means the reduction of money supply, this will bring back the LM curve. • So monetary policies in the open economy is of little or even no effect. TS. PHAN THẾ CÔNG IS-LM-BP analysis: fixed exchange rates Fixed exchange rates: The BP curve TS. PHAN THẾ CÔNG 1/4/2016 30 IS-LM-BP analysis: fixed exchange rates O r Y r1 SURPLUS DEFICIT BP TS. PHAN THẾ CÔNG IS-LM-BP analysis: fixed exchange rates O r Y SURPLUS DEFICIT Y1 BP TS. PHAN THẾ CÔNG IS-LM-BP analysis: fixed exchange rates O r Y r1 Y1 a BP TS. PHAN THẾ CÔNG 1/4/2016 31 IS-LM-BP analysis: fixed exchange rates O r Y r1 Y1 a Assume that national income rises Y1 BP TS. PHAN THẾ CÔNG IS-LM-BP analysis: fixed exchange rates O r Y r1 Y1 a Y1 Assume that national income rises Deficit if rate of interest remains at r1 b BP TS. PHAN THẾ CÔNG IS-LM-BP analysis: fixed exchange rates O r Y r1 Y1 a Y1 Rate of interest must rise to r2 to restore balance of payments c r2 BP TS. PHAN THẾ CÔNG 1/4/2016 32 IS-LM-BP analysis: fixed exchange rates Full equilibrium in the goods, money and foreign exchange markets TS. PHAN THẾ CÔNG IS-LM-BP analysis: fixed exchange rates O r Y BP LM IS r1 Y1 Full equilibrium in the goods, money and foreign exchange markets a TS. PHAN THẾ CÔNG IS-LM-BP analysis: fixed exchange rates Effect of an expansionary fiscal policy under fixed exchange rates TS. PHAN THẾ CÔNG 1/4/2016 33 IS-LM-BP analysis: fixed exchange rates O r Y BP LM1 IS1 r1 Y1 An expansionary fiscal policy IS2 a r2 Y2 b TS. PHAN THẾ CÔNG IS-LM-BP analysis: fixed exchange rates O r Y BP LM1 IS1 a r1 Y1 An expansionary fiscal policy IS2 r2 b Y2 Balance of payments surplus causes money supply to expand TS. PHAN THẾ CÔNG IS-LM-BP analysis: fixed exchange rates O r Y BP LM1 IS1 a r1 Y1 An expansionary fiscal policy IS2 r2 b Y2 Restoration of full equilibrium LM2 r3 Y3 c TS. PHAN THẾ CÔNG 1/4/2016 34 ISLMBP analysis: fixed exchange rates O r Y BP LM1 IS1 r1 Y1 An expansionary fiscal policy: BP curve steeper than LM curve IS2 a TS. PHAN THẾ CÔNG IS-LM-BP analysis: fixed exchange rates a O r Y BP LM1 IS1 r1 Y1 An expansionary fiscal policy: BP curve steeper than LM curve IS2 r2 b Y2 TS. PHAN THẾ CÔNG IS-LM-BP analysis: fixed exchange rates O r Y BP LM1 IS1 r1 Y1 An expansionary fiscal policy: BP curve steeper than LM curve IS2 a r2 b Y2 Balance of payments deficit causes money supply to contract TS. PHAN THẾ CÔNG 1/4/2016 35 ISLMBP analysis: fixed exchange rates O r Y BP LM1 IS1 r1 Y1 An expansionary fiscal policy: BP curve steeper than LM curve IS2 a r2 b Y2 Restoration of full equilibrium LM2 r3 Y3 c TS. PHAN THẾ CÔNG IS-LM-BP analysis: fixed exchange rates Effect of an expansionary monetary policy under fixed exchange rates TS. PHAN THẾ CÔNG IS-LM-BP analysis: fixed exchange rates O r Y BP LM1 IS a r1 Y1 An expansionary monetary policy TS. PHAN THẾ CÔNG 1/4/2016 36 IS-LM-BP analysis: fixed exchange rates O r Y BP LM1 IS a r1 Y1 An expansionary monetary policy LM2 Y2 r2 b TS. PHAN THẾ CÔNG IS-LM-BP analysis: fixed exchange rates O r Y BP LM1 IS a r1 Y1 An expansionary monetary policy Y2 LM2 r2 b Balance of payments deficit causes money supply to contract again TS. PHAN THẾ CÔNG ISLMBP analysis: fixed exchange rates O r Y BP LM1 IS a r1 Y1 An expansionary monetary policy Y2 LM2 r2 b Full equilibrium is restored back at point a TS. PHAN THẾ CÔNG 1/4/2016 37 ISLMBP analysis: fixed exchange rates Floating exchange rates: The BP curve TS. PHAN THẾ CÔNG ISLMBP analysis: floating exchange rates O r Y BP SURPLUS Appreciation TS. PHAN THẾ CÔNG ISLMBP analysis: floating exchange rates O r Y BP DEFICIT Depreciation TS. PHAN THẾ CÔNG 1/4/2016 38 ISLMBP analysis: fixed exchange rates Effect of an expansionary fiscal policy under floating exchange rates TS. PHAN THẾ CÔNG ISLMBP analysis: floating exchange rates O r Y BP LM IS1 Y1 An expansionary fiscal policy IS2 Y2 r 1 r 2 b a TS. PHAN THẾ CÔNG ISLMBP analysis: floating exchange rates O r Y BP LM IS1 Y1 An expansionary fiscal policy IS2 a Y2 r 1 r 2 b Balance of payments surplus causes the exchange rate to appreciate TS. PHAN THẾ CÔNG 1/4/2016 39 ISLMBP analysis: floating exchange rates O r Y BP LM IS1 Y1 An expansionary fiscal policy IS2 a Y2 r 1 r 2 b The appreciation causes the IS curve to shift to the left TS. PHAN THẾ CÔNG IS-LM-BP analysis: floating exchange rates O r Y BP1 LM IS1 Y1 An expansionary fiscal policy IS2 a Y2 r 1 r 2 b Full equilibrium is restored at point c BP2 IS3 Y3 r 3 c TS. PHAN THẾ CÔNG IS-LM-BP analysis: floating exchange rates O r Y LM BP1 IS1 Y1 An expansionary fiscal policy: BP curve steeper than LM curve a r 1 IS2 Y2 r 2 b TS. PHAN THẾ CÔNG 1/4/2016 40 IS-LM-BP analysis: floating exchange rates O r Y LM BP1 IS1 Y1 An expansionary fiscal policy: BP curve steeper than LM curve a Y2 r 1 r 2 b IS2 Balance of payments deficit causes exchange rate to depreciate TS. PHAN THẾ CÔNG IS-LM-BP analysis: floating exchange rates O r Y LM BP1 IS1 Y1 An expansionary fiscal policy: BP curve steeper than LM curve a Y2 r 1 r 2 b IS2 Depreciation causes the IS curve to shift to the right TS. PHAN THẾ CÔNG ISLMBP analysis: floating exchange rates O r Y LM BP1 IS1 Y1 An expansionary fiscal policy: BP curve steeper than LM curve IS3 a Y2 r 1 r 2 b BP2 IS2 Y3 r 3 c Full equilibrium is achieved at point c TS. PHAN THẾ CÔNG 1/4/2016 41 IS-LM-BP analysis: fixed exchange rates Effect of an expansionary monetary policy under floating exchange rates TS. PHAN THẾ CÔNG ISLMBP analysis: floating exchange rates O r Y LM1 IS1 Y1 An expansionary monetary policy a Y2 r 1 r 2 BP1 LM2 b ISLMBP analysis: floating exchange rates O r Y LM1 IS1 Y1 An expansionary monetary policy a Y2 r 1 r 2 b The balance of payments deficit causes the BP line to shift downward BP1 LM2 1/4/2016 42 ISLMBP analysis: floating exchange rates O r Y LM1 IS1 Y1 An expansionary monetary policy a Y2 r 1 r 2 b The depreciation causes the IS curve to shift to the right BP1 LM2 ISLMBP analysis: floating exchange rates O r Y BP2 LM1 IS1 Y1 An expansionary monetary policy a Y2 r 1 r 2 b Full equilibrium is restored at point c BP1 IS2 Y3 r 3 LM2 c Thanks for attention TS. PHAN THẾ CÔNG