【正文】 oreign exchange market, and home bond market which is ignored in the analysis according to the Walras’ Law. See Figure 319. 20 S Y Ye Se AA DD ?2 ?3 1 Figure 319 Shortrun Equilibrium 21 ?Temporary Changes in Policies I. Moary Policy Channel: Ms?i?S?AA schedule moves。 S?CA changes?AD changes?Y changes?new equilibrium. See Figure 31101. II. Fiscal Policy Channel: G (T)?AD changes?Y?DD schedule moves。 Y changes?i changes?S changes?new equilibrium See Figure 31102. 22 S Y Ye Se AA DD Figure 31101 Moary Policy AA1 S1 Y1 Rise in Ms 23 S Y Ye Se AA DD Figure 31102 Fiscal Policy DD1 S1 Y1 Expansionary fiscal policy 24 ?Temporary Changes in Policies III. Policies to Maintain Full Employment Real Shocks: See Figure 31111. Moary Shocks: See Figure 31112. IV. Inflation Bias amp。 Other Problems It seems that moary and fiscal policies work perfectly well. However, things are not that wonderful. ?Sticky price ?Disturbance identification ?Political considerations ?Time lags 25 S Y S2 AA DD1 Figure 31111 Real Shocks DD S1 Yf 1 AA1 Y2 2 3 S3 Real shocks 26 S Y S2 AA1 DD1 Figure 31112 Moary Shocks DD S3 Yf 3 AA Y2 2 1 S1 moary shocks 27 ?Permanent Changes in Policies A permanent policy shift affects not only the current value of the government’s policy instrument, but also the longrun exchange rate. This in turn affects expectations about the future exchange rate, because these changes in expectations have a major influence on the exchange rate prevailing in the short run. the effects of permanent policy shifts differ from those of temporary shifts. We assume the economy is initially at a longrun equilibrium position. The exchange rate is at its longrun level and with no change in the exchange rate expected. I. Permanent Changes in Moary Policy 28 S Y Yf Se AA2 DD Figure 31121 Shortrun Effects of A Permanent Moary Policy AA1 S1 Y1 1 2 3 expectations 29 S Y Yf Se AA2 DD Figure 31122 Longrun Adjustments AA1 S1 Y1 1 2 3 DD1 AA3 ?S 30 ?Permanent Changes in Policies II. Permanent Changes in Fiscal Policy Conclusion: If the economy starts at longrun equilibrium, a permanent change in fiscal policy has no effect on output. Instead, it causes an immediate and permanent exchange rate jump that affects exactly the fiscal policy’s direct effect on aggregate demand (Krugman and Obstfeld, 2020, 460). See Figure 3113. See also Krugman and Obstfeld (2020) for a detailed explanation for the conclusion on page 460. 31 S Y Yf AA DD1 Figure 3113 Effects of A Permanent Fiscal Policy DD2 1 3 2 S2 S1 32 I. The XX Schedule Suppose a country wants to hold a desired level of current account (say, X). That is, CA(SP*/P, YT)=X It is easily seen that in Figure 3114, the XX schedule is upward. A Note on the Slope It is not that easily seen from the Figure that the DD schedule is steeper than the XX schedule. Using some simple mathematical tools may help us understand the economic implications behind the fact. ?Macroeconomic Policy amp。 the Current Account 33 S Y Yf Se AA DD Figure 314 Macroeconomic Policies amp。 the Current Account XX AA1 2 DD1 1 3 34 ?Macroeconomic Policy amp。 the Current Account II. Macroeconomic Policy and the Current Account Moary Policy and the Current Account An expansionary moary policy leads to the depreciation of home currency and an increase in output. From Figure 314, it is easily seen that an expansionary moary policy improves the current account. Fiscal Policy and the Current Account An expansionary fiscal policy leads to the appreciation of home currency and an increase in output. From the Figure, it is easily seen that both temporary and permanent fiscal policy deteriorates the current account. 35 ?Assignments ?Review Chapter 16 (including its appendix I) and any intermediate Macroeconomics textbook (I remend Mankiw (2020) for his excellent statement of ISLM model) for a better understanding of the principles related to this chapter. 36 ?Content ?Why Study Fixed Exchange Rates? ?Intervention and Money Supply ?Fixing the Exchange Rate ?Stabilization Policy in a Fixed Rate ?Balance of Payments Crises ?Sterilized Intervention ?Assignments 37 ?Why Study Fixed Exchange Rates? I. Management Floating II. Regional Currency Arrangements III. Developing Countries and Transition Countries See Table 321 in the appendix. IV. Lessons of the Past for the Future Pure Fixed Pure Floating Dirty Floating Flexibility Independence Degree of Intervention Theoretical Theoretical Real World 38 ?Intervention and Money Supply I. The Central Bank Balance Sheet amp。 the Money Supply Recall the reduced form of the central bank balance sheet we have learned. II. Intervention and Money Supply . 331 Suppose a central bank sells $100 worth of foreign bonds for home currency. See Table 332. A s s e t L i a bi l i t i e s F or e i g n A s s e t s D om e s t i c A s s e t s M on e y B a s e D e pos i t s h e l d by pr i v a t e ba n ks C u r r e n c y i n c i r c u l a t i on N ot e : 1. F or e i gn a s s e t s c ons i s t m a i nl y of f or e i gn c ur r e nc y bon ds ow ne d by t he c e nt r a l ba nk. 2. D om e s t i c a s s e t s a r e c e nt r a l ba nk hol d i ngs of c l a i m s t o f ut ur e pa ym e nt s by i t s o w n c i t i z e ns a nd dom e s t i c i ns t i t ut i ons . T he s e c l a i m s us ua l l y t a ke t he f or m o f dom e