Uncovered interest rate parity
To forecast future spot rates:
spot*[(1+Ra)/(1+Rb)]^t
Covered interest rate parity
No-arbitrage forward rate = spot*[1+Ra(days/360)]/[1+Rb(days/360)]
All rates quoted in a/b
International Fisher relation
(1+RnomA) / (1+RnomB) = [1+ E(inflationA)] / [1+ E(inflationB)]
Relative purchasing power parity
Expected spot rate = spot*[(1+inflationA)/(1+ inflationB)]^t
Mundell-Fleming model
Monetary policy and fiscal policy’s effect on short-term exchange rates
High mobility: depreciation (appreciation) when monetary policy is expansionary (restrictive) and fiscal policy is restrictive (expansionary)
Low mobility: depreciation (appreciation) when monetary policy is expansionary (restrictive) and fiscal policy is expansionary (restrictive)
Signs of a currency crisis
- terms of trade deteriorate
- official fx reserves decline
- real exchange rate is substantially higher than the mean-reverting level
- inflation increases
- equity markets experience a boom-bust cycle
- money supply relative to bank reserves increases
- nominal private credit grows
Growth rate in potential GDP
= LT growth rate of technology + α(LT growth rate of capital) + (1-α)(LT growth rate of labor)
Classical growth theory
Population growth reduces productivity and drives GDP per capita back down after increase in capital or technological progress
Neoclassical growth theory
- steady state with constant marginal product of capital but diminishing marginal productivity of capital
- club convergence
- sustainable growth rate of output = growth rate of technology/labor’s share of GDP + growth of labor
Endogenous growth model
- Technological progress enhances productivity and growth rate
- Economic growth is unlimited
