Econ G25T: Open Economy Macroeconomics.
Problems and Discussion Questions #5
开放经济宏观经济学代写 Problems and Discussion Questions #5 1.What is the ‘honeymoon’ effect in the Krugman model of target zones? Why does it occur?
What is the ‘honeymoon’ effect in the Krugman model of target zones? Why does it occur?
Consider a target zone which allows a 10% variation in the exchange rate about a central parity (for example, if the central parity is 10, the ‘ceiling’ might be 11 and the ‘floor’ 9). If the target zone regime is perfectly credible, and assuming uncovered interest parity holds, how much can interest rates differ from the world interest rate? (Hint – consider interest rates for different time periods: for example, a six-month interest rate, a yearly interest rate, and so forth.)
Suppose the exchange rate is at its ceiling in a target zone regime. It is perfectly credible until time t0 when there is a political change which means there is a 10% probability of the target zone regime collapsing within the next month. A collapse would mean that the exchange rate would increase a further 20% above its previous ceiling (given the way we are measuring exchange rates, an increase is a depreciation). What happens to interest rates?
How successful has the Krugman model of target zones been in explaining the behaviour of target zones in practice? How can divergences between the theory and empirical evidence be explained?
In Krugman’s Nobel Prize lecture (see reading list for reference), he quotes the governor of the Central Bank of Portugal who said (at a time when the Portuguese currency was under pressure) ‘when I have six months of reserves…I will have no reserves’. What is the logic behind this statement?
In the Krugman model of a speculative attack, what is the shadow exchange rate? Why does the attack take place at exactly the point in time when the shadow exchange rate equals the actual (pegged) exchange rate?
Must a speculative attack on a fixed exchange rate regime be successful? If not, why might the attack have taken place in the first place?
Can there be a ‘self-fulfilling’ speculative attack? That is, if enough agents expect there will be a devaluation at a certain time, there will be a devaluation, but no devaluation occurs if agents do not expect it to happen?
Is it always optimal for the authorities to raise interest rates in a currency crisis? Discuss with reference to an appropriate theoretical model.
‘The fact that fixed exchange rate regimes are subject to speculative attack destroys the case for fixed exchange rates.’ Discuss.