A Long-Run exchange rate Model based on ppp Figure 15-1: Long-Run Time Paths of U.S. Economic Variables after a Permanent Increase in the Growth Rate of the U.S. money Supply (a)U.s. money supply, Mus b)Dollar interest rate, Rs R2=R1+△π lope=兀+△兀 Mus. to Slope=π t0 Ti e to Time (c)U.s. price level, Pl (a)Dollarleuro exchange rate, Es/e s|ope=π+△兀 slope=兀+△兀 Slope=πI Slope=πl Time Time Copyright C 2003 Pearson Education, Inc Slide 15-16
Copyright © 2003 Pearson Education, Inc. Slide 15-16 Slope = + Slope = + t0 MUS, t0 Slope = (a) U.S. money supply, MUS Time Slope = Slope = t0 Slope = + t0 t0 R$ 2 = R$ 1 + R$ 1 Figure 15-1: Long-Run Time Paths of U.S. Economic Variables after a Permanent Increase in the Growth Rate of the U.S. Money Supply (d) Dollar/euro exchange rate, E$/€ Time (b) Dollar interest rate, R$ Time (c) U.S. price level, PUS Time A Long-Run Exchange Rate Model Based on PPP
A Long-Run exchange rate Model based on ppp In this example, the dollar interest rate rises because people expect more rapid future money supply growth and dollar depreciation The interest rate increase is associated with higher expected inflation and an immediate currency depreciation Figure 15-2 confirms the main long-run prediction of the fisher effect Copyright C 2003 Pearson Education, Inc Slide 15-17
Copyright © 2003 Pearson Education, Inc. Slide 15-17 • In this example, the dollar interest rate rises because people expect more rapid future money supply growth and dollar depreciation. • The interest rate increase is associated with higher expected inflation and an immediate currency depreciation. • Figure 15-2 confirms the main long-run prediction of the Fisher effect. A Long-Run Exchange Rate Model Based on PPP