rather than have another back and forth, can someone look in the CFAI text? I don’t have the books on me. CPK’s reasoning seems credible, but in Schweser they make the point to say that an expansionary monetary policy leads initially to more money in one’s pocket, and so they use it to import…seemed strange at first but its grown on me, but now we need the actual CFAI text answer. Can someone please look into this?
Per CFA Unexpected Expansionary Monetary: Leads to depreciation of currency - Real rates drop temporarily - Upward pressure on domestic prices - Accelerating inflation Unexpected Expansionary Fiscal: Lead to appreciation of currency (most likely) - Real rates increase - Acceleration of domestic economic activity and inflation - Most believe interest rate effect will dominate leading to appreciation, not depreciation.
that doesnt tell us anything about current account or capital account. but upward pressure on domestic prices will increase your imports and reduce your exports which leads to capital account deficit (at least according to schweser)
mil: CFAI is all I read, this what they say! QUick Sheet is correct, Schweser books are wrong (typical).
So what is the final word on this?
depends who you believe, schweser or cfai. except cfai doesnt explicitly write current accoutn deficit
ridiculous
I’ll add some fuel to the fire: Stalla SG says: Expansionary monetary policy real rate effects 1.Real rate decreases 2.Drop in real rate = financial account deficit 3.Deteriorating balance causes currency to depreciate 4.Depreciating currency leads to stimulation in exports, which stimulates economy. Expansionary monetary policy price effects 1.Domestic prices increase 2.Imports increase causing current account deficit to decrease 3.Currency depreciates 4.Current account deficit is matched by an increase in financial account Overall, currency depreciates in long run and short run. Expansionary fiscal policy real rate effects 1.Real interest rates increase 2. Financial account increases 3.Currency appreciates 4.Financial account increase matched by current account decrease Expansionary fiscal policy price effects 1.Prices go up 2.Current account decreases 3.Currency decreases 4.Current account decrease matched by financial account increase Overall, it is unclear whether or not currency will increase or decrease. However, most of the time, the real rate effects occur in the short run and the price effects occur in the long run.
schweser and stalla says current accoutn deficit and cfai “implies” current account deficit–tough call
adding fuel to the fire … this is from schweser’s errata: Correction 1PM Q76 The solution states that an expansionary money supply shifts the current account to surplus via a depreciating currency. If you take a long run view, this would be true i.e. exchange rates move to keep imports and exports competitive which is the whole point of a floating system. However on page 85 book 2 Economic Schweser states “Expansionary monetary policy reduces a current account surplus or increases a deficit” The fact that currency then depreciates is the correcting mechanism. Posted: 2009-06-01 aaaaaaahhhhhhh so confusing. cant we just have a right or wrong simple answer !?
i got a response from schweser. i basically sent them an email with my very first post above and here is their response: The issue is a matter of perspective–short and long run. In the short run, an unanticipated expansionary monetary policy stimulates the economy, and is not immediately inflationary. This increased economic activity increases imports and increases the current account deficit. In the long run, the policy will become evident leading to inflation and a depreciation of the currency. This means that imports will become more expensive and will decrease. The country’s exports, on the other hand, will become cheaper to foreign buyers, and will increase. Thus, in the long run, the trade deficit will decrease. This relationship between the current account deficit and time is often referred to as the J curve, worse in the short run, and better in the long run. so this is pretty unreal, cuz those 4 concepts in the PM section are all different so how are we supposed to know to take the J-curve view of it? w/e i will just memorize that in short run there’s a current account deficit and in long run a current account surplius.
bumping this up to make sure everyone got this
thanks dude! i’ll memorise it in the short term and understand it in the long term 
thanks!