Power Parity π ↑ Unchanging In L-R, i ↑ due %E ↑ due in LR X-M to Inflation to relative (PPP) X or M Expectations version of Effect; Purchasing + %V i>if but No for Power Capital continuous Parity Inflows; Money Purchasing Interest Parity Creation Power Theorem Parity saying i-if merely reflects %Ee (+ve or ↑) Note: Use only one of the two above versions of Purchasing Power Parity for LR; both lead to the same reasoning. Domestic Goods Market Shocks: Expansionary Fiscal Policy G ↑ and S-R M↑ X-M ↓ thus Y ↑ Trade Trade E↑ Account(e) ↓ i ↑due to S-R Capital Domestic International Inflows Financial Supply ↑ E↓ Investment ↓ Out Effect Investment ↑ Account (f) due to ↑ Crowding BP ( e+ f) Sum of (e ) E? and (f) = ? S↑-D ↑ uncertain uncertain =? uncertain G Note that in the Above-the-Line BP, (e ) and (f) work against each other on E; Net impact of on E is ambiguous. Secondary MT to new LR uncertain uncertain uncertain uncertain adjustment eq. E ↑ or ↓  P ↑ LR E↑ due to iff G is E = P/Pf ‘monetized’: Absolute when Bonds Version of are sold to Purchasing Central Bank: iff M Power G = or Parity iff M π ↑ LR %E ↑ = G = ↑– f Relative Version of Purchasing
Power Parity π ↑ in + %V for continuous Money Creation LR (PPP) X or M Unchanging X-M %E ↑ due to relative version of Purchasing Power Parity Purchasing Power Parity In L-R, i ↑ due to Inflation Expectations Effect; i>if but No Capital Inflows; Interest Parity Theorem saying i-if merely reflects %Ee (+ve or ↑) Note: Use only one of the two above versions of Purchasing Power Parity for LR; both lead to the same reasoning. Domestic Goods Market Shocks: Expansionary Fiscal Policy G ↑ and thus Y ↑ S-R Trade M↑ X-M ↓ Trade Account(e) ↓ E↑ i ↑due to Effect S-R International Investment Capital Inflows ↑ Financial Account (f) ↑ Supply ↑ E↓ Domestic Investment ↓ due to Crowding Out BP ( e+ f) Sum of (e ) and (f) = ? uncertain S↑-D ↑ =? uncertain E? uncertain Note that in the Above-the-Line BP, (e ) and (f) work against each other on E; Net impact of G on E is ambiguous. Secondary adjustment E ↑ or ↓ MT to new LR eq. uncertain uncertain uncertain uncertain P ↑ or LR E↑ due to E = P/Pf Absolute Version of Purchasing Power Parity iff  G is ‘monetized’: when Bonds are sold to Central Bank: iff G = M π ↑ LR %E ↑ = ↑– f Relative Version of Purchasing iff G = M
Summary%20of%20Impacts%20of%20Changes%20in%20Various%20Variables%20on%20FOREX%20Rates.docx