【正文】 1 6 02 0 02 4 02 8 065 70 75 80 85 90 95 00 05A U S T R A L I A N E E R A U S T R A L I A R E E R?= 60 Figure 223 Simple Test of PPP on US$ Source: BIS. 7080901 0 01 1 01 2 01 3 01 4 065 70 75 80 85 90 95 00 05U S N E E R U S R E E R?= 61 Figure 224 Simple Test of PPP on UK Pound Source: BIS. 60801 0 01 2 01 4 01 6 01 8 02 0 065 70 75 80 85 90 95 00 05U K N E E R U K R E E R?= 62 Figure 225 Simple Test of PPP on Japanese Yen Source: BIS. 204060801 0 01 2 065 70 75 80 85 90 95 00 05J A P N E E R J A P R E E R?= 63 VI. What Is Wrong with PPP? Technical Problems ?The choice of price index ?Classifications of modities ?The choice of a base year Other Considerations ?Trade barriers and nontradables ?Departure from free petition ?HarrodBalassaSamuelson Effect ?Purchasing Power Parity 64 VII. A Short Comment ?The most influential theory ?A benchmark for the exchange rate determination ?An inplete theory of exchange rate determination ?Pioneering researches from the perspective of money quantity hypothesis ?Purchasing Power Parity 65 VIII. HarrodBalassaSamuelson Effect The theory was independently raised by Balassa and Samuelson in 1964. The theory proves that price index in richer countries or counties with higher percapita ine is higher than that in poorer counties or economies. Definitions ?LT and LN, productivity in the tradable and nontradable sectors。vis major trading partners, differentials between the inflation target and expected inflation in major trading partners, and so forth. The rate of crawl can be set to generate inflationadjusted changes in the exchange rate (backward looking), or it can be set at a preannounced fixed rate and / or below the projected inflation differentials (forward looking). ?Exchange Rate Regimes 42 ?Exchange rates within crawling bands The currency is maintained within fluctuation margins of at least ?1 percent around a central rate, or the margin between the maximum and minimum values of the exchange rate exceeds 2 percent, and the central rate or margins are adjusted periodically at a fixed rate or in response to changes in selective quantitative indicators. The degree of exchange rate flexibility is a function of the width of the band. ?Exchange Rate Regimes 43 ?Managed floating The moary authority attempts to influence the exchange rate without having a predetermined path or target for it. Indicators for managing the rate include the balance of payments position, the level of international reserves, etc. ?Independently floating The exchange rate is determined by the markets. Official intervention in the foreign exchange market is infrequent and discretionary and is usually aimed at moderating the rate of change of, and preventing undue fluctuations in, the exchange rate, rather than at establishing a level for it. ?Exchange Rate Regimes 44 III. Polar Regime vs. Intermediate Regime Polar Regimes Also labeled as corner solution. ?Fixed Exchange Rate Regimes: including the first and second types of regimes ?Floating Exchange Rate Regimes: the last type of regime. Intermediate Exchange Rate Regimes Including the third to seventh regimes, also labeled as inner solution. ?Exchange Rate Regimes 45 Note: The flexibility of exchange rate regime and the independence of moary policy increase from the first to the final type of regimes. On the contrary, the stability of the exchange rate is decreasing. See the Figure below. Fixed Floating Flexibility of Exchangerate Regime Moary Policy Independence Exchange Rate Stability ?Exchange Rate Regimes 46 of the Exchangerate Regimes ?Increasingly more and more floaters。1=US$2. Then the British sells the pound for the . $ and deposits the US$200 million in a bank in New York. A year later, he or she will receive US$220 million. If the exchange rate of the pound to the US dollar does not change, surely, he or she will have an extra ine of 163。100 million, and he or she deposits the money in a bank running its businesses in London. ?Foreign Exchange Transactions 32 A year later, the British will receive an ine of about 163。1＝ US$2 in market A, FFR1=US$ in market B, and 163。1＝ US$2 in market A, but 163。 H K $ UK ? B a s ke t 2020 12 0 5 2020 12 0 6 2020 12 0 7 2020 12 10 1 2020 12 11 2020 12 12 000 2020 12 13 2020 12 14 2020 12 17 10. 6516 2020 12 18 2020 12 19 2020 12 20 2020 12 21 018 2020 12 24 2020 12 25 2020 12 26 2020 12 27 00 2020 12 28 2020 03 18 2020 03 19 12 ?Nominal rate vs. real rate Nominal Exchange Rate is the rate publicly announced or released by a country’s moary authorities etc. Real Exchange Rate (RER) is the rate adjusted by the relative prices between the countries under consideration. Let P, P* and S denote domestic and foreign prices, and the exchange rate, respectively. The real exchange rate can be defined as follows, RER=SP*/P As an example, the rates in Table 211 and Table 212 are nominal ones and real ones. ?The Exchange Rate 13 Table 212 Nominal and Real Rates Source: NBSC。1 Contents ?Foreign Exchange Market ?The Exchange Rate ?Foreign Exchange Transactions ?Exchange Rate Regimes ?Assignments 2 I. Foreign Exchange A Dynamic Definition Foreign Exchange, also labeled as international