Power Parity Note: Use only one of the two above versions of Purchasing Power Parity for LR; both lead to the same reasoning. Causes Time Horizon Trade Trade FOREX FOREX rate Note Balance International Money Market Shocks: U.S. Expansionary Monetary Policy (MSf↑) MSf ↑ and S-R X↑ X-M ↑ or Excess E↓ thus Yf ↑ Trade Trade Supply Account↑(c) If due to S-R Capital Financial Excess E↓ Liquidity International Inflows Account↑ Supply Effect Investment (d) S-R (c ) + (d) ↑↑ Excess E↓↓ BP Combined Supply (c ) +(d) (Second M-T to new X↓ , M↑ X-M ↓ Supply E starts ↑ Round) LR eq. down A secondary/ E↓↓ Cushioning Effect Note that at the beginning, (b) <(a); and then in the Long-run, (b) may partially offset (a) with “Cushioning Effect”. Pf ↑ LR Unchanged E↓ due to In Mf Vf = Trade X or X-M E = P/Pf : Pf yf for PPP M Absolute M(S)f ↑ Version of Purchasing Power or Parity πf ↑ Unchanging In L-R, if ↑ %E ↓due in LR X-M due to to relative Trade X or M Inflation version of PPP Expectations + %Vf Purchasing Effect; LR for Power I<if but No continuous Parity Capital Money Purchasing Power Outflows; Creation Parity Interest Parity Theorem saying i-if
Power Parity Note: Use only one of the two above versions of Purchasing Power Parity for LR; both lead to the same reasoning. Causes Time Horizon Trade Trade Balance FOREX FOREX rate Note International Money Market Shocks: U.S. Expansionary Monetary Policy (MSf↑) MSf ↑ and thus Yf ↑ S-R Trade X↑ X-M ↑ or Trade Account↑(c) Excess Supply E↓ If due to Liquidity Effect S-R International Investment Capital Inflows Financial Account↑ (d) Excess Supply E↓ BP (c ) +(d) S-R Combined (c ) + (d) ↑↑ Excess Supply E↓↓ (Second Round) E↓↓ M-T to new LR eq. X↓ , M↑ X-M ↓ Supply down E starts ↑ A secondary/ Cushioning Effect Note that at the beginning, (b) <(a); and then in the Long-run, (b) may partially offset (a) with “Cushioning Effect”. Pf ↑ In Mf Vf = Pf yf for M(S)f ↑ or LR Trade PPP X or M Unchanged X-M E↓ due to E = P/Pf : Absolute Version of Purchasing Power Parity πf ↑ in + %Vf for continuous Money Creation LR Trade PPP X or M Unchanging X-M %E ↓due to relative version of Purchasing Power Parity Purchasing Power Parity In L-R, if ↑ due to Inflation Expectations Effect; LR I<if but No Capital Outflows; Interest Parity Theorem saying i-if
Summary%20of%20Impacts%20of%20Changes%20in%20Various%20Variables%20on%20FOREX%20Rates.docx