exchange rates
choose ONE of the following questions for your small essay and prepare a 2,000 word written report.
1. Consider a country with a flexible exchange rate, and which initially has a current account surplus of zero. Then, suppose there is an anticipated increase in future total factor productivity.
a) Determine the equilibrium effects on the domestic economy in the case where there are no capital controls. In particular, show that there will be a current account deficit when firms and consumers anticipate the increase in future total factor productivity.
b) Now, suppose that the government dislikes current account deficits, and that it imposes capital controls in an attempt to reduce the current account deficit. With the anticipated increase in future total factor productivity, what will be the equilibrium effects on the economy? Do the capital controls have the desired effect on the current account deficit? Do capital controls dampen the effects of the shock to the economy on output and the exchange rate? Are capital controls sound macroeconomic policy in this context? Why or why not?
c) The domestic central bank increases the supply of money under a flexible exchange rate regime, leading to a depreciation of the nominal exchange rate. If the government had imposed capital controls before the increase in the money supply, would this have had any effect on the exchange rate depreciation? Explain your results and comment on their significance.
2. Read Chapter 20 of recommended textbook: Robert C. Feenstra and Alan M. Taylor, International Economics, Worth Publishers: 2nd Revised edition, International Edition (13 April 2011). ISBN-10: 1429269030. ISBN-13: 978-1429269032.
Consider how fixed exchange rate regimes differ in advanced economies versus emerging markets / developing countries.
a) How do exchange rate crises differ across these groups?
b) Among which group are the economic costs higher? Cite evidence to support your answer.
c) A depreciation leads to an expansion in export demand. Given your answer to b), why does the other group of countries suffer political costs?
d) Which group of countries is more likely to adopt a fixed exchange rate regime?
e) Which groups are more likely to suffer from twin or triple crises? Why?
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