International Macro
If the real interest rate of country A improves, how does this affect ER between country A and B
If the real interest rate in country A increases relative to country B, then the currency of country A appreciates relative to country B!!
If real interest rates are equal in 2 countries and UIRP and Fisher equation hold, then the expected change in the ER equals... 1. the expected inflation differential 2. the risk premium 3. zero 4. we cannot tell.
1. the expected inflation differential
If the nominal interest rate of country A relative to country B improves, how does this affect ER between country A and B?
Appreciation or depreciation! Depends on inflation and real interest rate!
How would you interpret the fact that the Phillippines exhibit a CA surplus? Good sign for the country?
CA surplus always means, there is negative FA! 1. posibility: Country is perceived as a bad investment choice and hence capital flows out of the country.-->bad sign 2. possibility: Central Bank is buying foreign currencies to prevent an appreciation of home currency. -->unlikely, bc country seems to be in a rough position if it receives so many Unilateral transfers
Consider the US and CH: An increase in the real interest rate in CH will... 1. weaken the CHF vis à vis the USD 2. strengthen the CHF vis à vis the USD 3. leave the CHF/USD ER unaffected 4. cannot really tell.
Consider the US and CH: An increase in the real interest rate in CH will... 2. strengthen the CHF vis à vis the USD
Swiss ressource trading firm buys coal mine in South Africa CHF 100 Mio. They pay by selling shares of various South African Companies.
Direct Investments -100 CHF Portfolio Investments +100 CHF
Instead of TB=0, Switzerland has a positive TB before an appreciation of CHF. Export & Import contracts are denoted in a foreign currency. Does the TB change during the currency contract period? How?
Exports & Imports are denoted in foreign currency, both will decrease in value. Because there is a surplus, the surplus will become smaller, which leads to a decrease in the TB
Suppose that there is an appreciation of CHF vis à vis other currencies. CH has a TB of zero before the appreciation. TB is expressed in CHF How does the TB change during the currency-contract Period, if export contracts are denoted in CHF and import contracts in foreign currencies?
Exports: no effect because they are denominated in CHF. Imports: become cheaper from Swiss perspective because CHF is more valuable and imports are denominated in foreign currency TB increases!
A Swiss bank withdraws USD 10 Mio. from a bank account and buys facebook shares
Facebook's Headquarter is relevant! (in USA) Capital in Bank accounts +10 Portfolio Investments -10 PF investments debit because Money flows out of Swiss bank
Russian farmers buy tractors for 100 Mio. from Swiss tractor factory. They pay taking a loan from a Swiss bank.
Goods Trade +100 Mio. (Credit) Bank Loans -100 Mio. (Debit)
What does the Trade Based Approach predict concerning ER, if domestic income rises?
If domestic income rises (GDP), the country imports more goods from abroad. The increasing demand for imports leads to a depreciation of CHF, because through imports, foreign currencies are demanded. --> E rises-->depreciation
Swiss ressource trading firm in South Africa makes a profit of CHF 1 Mio from Operation of a coal mine. They decide to donate all the profits to charity
Investment Income +1 Mio Unilateral Transfers -1 Mio
Monetary Approach: An decrease of domestic interest rates leads to a depreciation or appreciaton?
L = demand for real assets positive, if i negative positive, if y positive So Decrease of domestic interest rates leads to depreciation of domestic currency, E rises
Banker living in Germany, working in CH gets bonus payment of CHF 10'000 He spends all the money for skiing in Zermatt
Labor Income -10'000 (Debit) Services Trade +10'000 (Credit)
Give an example of a transaction that will only affect the current account of Switzerland?
Mafia buys Swiss cheese with money gained through illegal activities in cash
What is the NIIP (Net international investment position)
NIIP = Difference in value from a CH perspective between foreigners investing in CH and CH-residents investing abroad.
What happens to the NIIP (Net international investment position) After Donald Trump has been elected president, there has been a global flight to safety, leading to strong appreciation of the CHF vs. USD.
NIIP decreases: The value of an investment in CH remains the same, while value of foreign investment has decreased from a swiss perspective
What happens to NIIP and TB after an earthquake?
NIIP increases, because stocks in the country go down. Value of foreign assets held by domestic residents stay Value of domestic assets held by foreigners decrease! TB: Exports fall, Imports rise (Goods & services to rebuild) -->TB will deteriorate Current Account: Not clear! Either improve or decrease, depends on how much UT it gets from other countries
Suppose that there is an appreciation of CHF vis à vis other currencies. CH has a TB = zero before the appreciation. TB is expressed in CHF How does the TB change during the currency-contract Period, if both export and import contracts are denoted in foreign currency?
No effect on TB!
BoP transaction: A French doctor lives and works in Lausanne. His monthly salary of CHF 10'000 is paid onto a Swiss bank account.
No transaction! There is no touchpoint with foreign currency, because he lives in Switzerland and gets CHF
Given that relative PPP does not hold, can absolute PPP hold?
No, absolute PPP is a stricter version of relative PPP!
Monetary approach: How do interest rates affect domestic output?
Opposite effect: If interest rates rise, output decreases
A French Investor receives CHF 100'000 dividends from shares of various Swiss companies. He invests the money in swiss government bonds.
Portfolio Investments +100'000 Investment Income: -100'000
Covered Interest Rate Parity (CIRP/CIP)
Return on foreign investment = Return on domestic investment Foreign investment with Future contract (F)
Uncovered Interest Rate Parity (UIP)
Return on foreign investment = Return on domestic investment No Future Contract involved
A Swiss Bank receives 10 Mio. USD in fees for financial services provided to US-customers, paid to a bank account of the Swiss bank in the US (Exchange 1:1)
Services Trade + (Credit) Other Investments (Capital in Bank Accounts) - (Debit)
A foreign drug mafia smuggles drugs into CH and sells them form CHF 100 Mio to CH-customers. They then bring the money to a money launderer, who transfers the money on a CH-bank account. The official holder of the bank account is a foreign business man How leads this event to statistical errors in the Swiss balance of payments?
Swiss assets held by foreign residents increase by 100 Mio. Positive entry on Financial account (FA) Illegal import, hence there is no corresponding negative entry on the Trade balance (Goods Trade)
How can it be possible for a Country to have a Current account deficit AND a financial account deficit?
The country needs to have a huge surplus on official reserves! Central bank sells foreign currencies and gets CHF in return!
An immigrant from Kosovo in CH transfers 20'000 CHF to his relatives in Kosovo. The family uses the money to buy kitchen equipment from CH-producer
Unilateral Transfers -20'000 (Debit) Goods Trade +20'000 (Credit)
Is it possible to have a CA deficit without having any foreign capital inflows?
Yes! there can be a positive entry for official reserves that offsets the CA deficit z.B. if depreciation pressure on home currency and CB is selling its reserves such as foreign currencies to defend a peg/exchange rate target.
IS-LM-BP Model: Is expansionary fiscal policy effective under fixed exchange rates?
Yes, because it doesn't crowd out investments.
SNB policies to weaken the CHF: Why has the SNB not been rising nominal interest rates in CH? Shouldn't an increase in interest rates depreciate the currency according to UIRP?
Yes, but if you look at the fisher equation and consider that inflation in Switzerland is low, a nominal interest rate increase leads to an appreciation of the CHF!-->contradiction of the Monetary approach and the Fisher equation!
Is NIIP (Net international investment Position) the same as Net foreign assets (NFA)?
Yes, these two terms are used interchangeably!
If a spot rate (CHF/EUR) is lower than the cross rate (CHF/EUR), is the CHF over- or underpriced?
overpriced
Suppose the Phillipines have a strongly negative trade balance but still a positive current account. Is this possible?
yess, because phillippines abroad send money back home, which increases CA. CA = TB + NFP + NUT
