According to schweser, when unexpected expansionary monetary policy occurs, then the currency depreciates, and the current account goes into deficit. However, according to an answer from a schweser test question, expansionary monetary policy results in a currency depreciation, but this in turn leads to a surplus in the current account (logic being increase in money -> decrease in real rate -> depreciating currency -> increase in exports vs imports. Can anyone clear up this apparent discrepancy?
wouldnt that depreciating currency lead to more exports, less imports (cheaper for people to buy $ goods, more expensive for US people to buy other currency goods). So the current account of X-I, should lead to a current account deficit, no? sorry wrote that wrong. Imports go up, exports go down, so you get the deficit when you do X-I.
yes sorry, edited above… so then exports minus imports is positive, and its a current accont surplus, right? is schweser incorrect then or what?
i dont see where the confusion is: depreciating currency leads to higher exports and less imports, which implied current account surplus.
should be other way…current account surplus and financial account is in deficit, no?
bad_orange Wrote: ------------------------------------------------------- > i dont see where the confusion is: > > depreciating currency leads to higher exports and > less imports, which implied current account > surplus. Intuitively this is what I would like to think too. however Schweser does state that imports up, exports down, current acct deficit. Perhaps this has more to do with ST effects vs. longer term?
confusion is that schweser notes claim that there is a current accont deficit
schweser quicksheet completely contradicts schweser notes with the effect of current account. i find this frustrating.
anyone have the CFAI version of this? I have a feeling the Schweser text may be wrong…but then again I am usually wrong, so who knows.
Oh yeh, i just noticed the difference b/w schweser notes and quicksheet… current account surplus seems to make more sense.
I think current account will deficit with unexpected monetary expansion?
“Perhaps this has more to do with ST effects vs. longer term?” Yes - at first, there’s more domestic money, consumption increases (people spend it on more imports), and there’s a current account deficit (imports are greater than exports). However, over time the currency depreciation flows through the worldwide economy, and other countries realize that with a weakened currency, our exports are cheaper to them (and we can no longer afford their imports), so then we’re exporting much more than we import, leading to a current account surplus. That’s how I remember it, anyways (although I suck balls at econ, admittedly, so take that for what it’s worth).
skill-sounds good, I’ll buy it, thanks.
I’m a good con man. Can someone confirm that’s correct when they get a chance? I’m searching through SchweserPro right now and can’t find the section on currency appreciation/depreciation - anyone have an LOS# for me?
This whole thing is split into 2 effect - interest rate and the price effect. We take the long term effect which is the price effect for L2 [;-p] MS up -> IR down -> depreciation -> exports up -> currAcc surplus MS up -> IR down -> Infl up -> prices index up -> demand(exports) down -> currAcc deficit
skillionaire Wrote: ------------------------------------------------------- > “Perhaps this has more to do with ST effects vs. > longer term?” > > Yes - at first, there’s more domestic money, > consumption increases (people spend it on more > imports), and there’s a current account deficit > (imports are greater than exports). > > However, over time the currency depreciation flows > through the worldwide economy, and other countries > realize that with a weakened currency, our exports > are cheaper to them (and we can no longer afford > their imports), so then we’re exporting much more > than we import, leading to a current account > surplus. > > That’s how I remember it, anyways (although I suck > balls at econ, admittedly, so take that for what > it’s worth). Looks like a winner to me…
Just remember that everything is the same between fiscal and monetary unexpected expansion except that monetary expansion has low interest rates and fiscal expansion has high interest rates. So currency decreases under monetary because the current account and financial account decrease. And currency has a mixed effect under fiscal policy because current account decreases and financial account increases. There more complicated answers–I think $tarving_Banker gave one a few days ago that was echoed by Swaption about interest rate and price effect, but for the test, remember monetary policy=low int rates and fiscal policy=high int rates and currency depends on the effect of the current and financial accounts.
skillionaire is absolutely correct - there are LT and ST implications
rellison Wrote: ------------------------------------------------------- > Just remember that everything is the same between > fiscal and monetary unexpected expansion except > that monetary expansion has low interest rates and > fiscal expansion has high interest rates. So > currency decreases under monetary because the > current account and financial account decrease. > And currency has a mixed effect under fiscal > policy because current account decreases and > financial account increases. There more > complicated answers–I think $tarving_Banker gave > one a few days ago that was echoed by Swaption > about interest rate and price effect, but for the > test, remember monetary policy=low int rates and > fiscal policy=high int rates and currency depends > on the effect of the current and financial > accounts. Yes, if expansionary budget policy --> gov’t borrows more money to fund expenditures --> less money supply --> higher interest rates --> private savings and investment goes up and companies find it tougher to make profits if they need loans (crowding out effect)
Funny because in a question in book 7 they say the exact opposite, that unexpected expansionary policy causes real rates to go up at first which implies a stronger currency - which I would think is flat out wrong since unexpected expansionary policy would consist of either a surprise rate cut or buying treasury securities in the market. A surprise cut would cause real rates to go down as the nominal rates/inflation differential decreases. Buying treasury securities would provide banks with excess funding and the added liquidity would then cause banks to lend at lower rates as the compete for lending. Either way, inflation starts ticking up and nominal rates go down. Sometimes I feel like Schweser is very inconsistent with some of their answers.