This is giving me so much trouble.
In regards to this statement in the Balance of Payments Flows, can someone explain this in further detail for me please?
- regarding the portfolio balance channel- “Nations running large current account surpluses versus the US might find that their holdings of US dollar denominated assets exceed the amt they desire to hold in a portfolio context”. Say a canadian company sells to the US. if they have a surplus, and they charge CAD and receive CAD, their holdings of CAD will increase right? How would their holdings of US-denominated assets increase?
In the short term, expansionary Fiscal Policy (i.e. taxes low, govt spending high) leads to higher interest rates (issuing more and more debt to finance the spending) and eventually currency appreciation. This is according to the Mundell Fleming model with high capital mobility. The Portfolio Balance Theory is the long-run version of the Mundell Fleming model, that says that in the long-run, governments can just print more money to devalue their currency (or foreign countries stop buying their debt), leading to depreciation. Summary: Short run, expansionary fiscal policy = appreciation. Long term --> depreciation. This is pretty annoying to remember. Can’t wait for the 23rd of June!