international economics and trade

international economics and trade   Order Description   Coursework Brief Consider the asset approach of exchange rate determination, in which the short-run price adjustment of the goods market is sluggish. Answer the following questions: a) Utilise the graphs (and general equations) for the money and FX markets equilibrium conditions, explain how the exchange rate overshooting phenomenon may occur [40 marks] b) Following the parameterised model à la Dornbusch (1976), assume that • the goods market equilibrium conditions are governed by = ? + + ( ? ) ? = ( ? ? ) where d, y, r, e, p are the variables for demand, output(supply), interest rate, exchange rate and price in log form; ? represents the long-run (assuming constant) level of variable x. ? represents ; u can be considered as autonomous spending; , , are parameters (demand elasticities) and can be thought as the price adjustment speed parameter in response to excess demand • the money market equilibrium conditions are governed by ? = ? + where m is the (log) money stock variable; and are parameters (money demand elasticities) • the FX equilibrium conditions are governed by = ? + ( ? ? ) where r* is the interest rate in the world capital market (assuming constant); can be thought as the parameter for the expected adjustment speed of exchange rate Solve the model and Show that the cases of over-/under-shooting depends on 1? .0 1? Explain and comment on your derivations and results. c) Utilise literature and illustrate whether the exchange rate overshooting model is supported by empirical findings and is useful for policy makings. [20 marks] Notes: In addition to the relevant discussions from the lectures, seminars and the reference textbooks, the following reading list may also be helpful. ). The following list contains hyperlinks for access (simply by clicking). You may also access these papers via the links from Blackboard or iFind searching. Self-exploration and research for other good quality of literatures are also recommended. [40 marks] 5 • Dornbusch, R. 1976. Expectations and Exchange Rate Dynamics. Journal of Political Economy. 84 (6), 1161–1176 • Frenkel, J. A. and Rodriguez, C. A. 1982. Exchange Rate Dynamics and the Overshooting Hypothesis. IMF Staff Papers, 29(1), 1-30 • Rogoff, K. 2002. Dornbusch's Overshooting Model After Twenty-Five Years. IMF Working Paper, No. 02/39, 1-4 • Bjørnland, H. C. 2009. Monetary Policy and Exchange Rate Overshooting: Dornbusch was right after all. Journal of International Economics,79, 64-77 • Kim, S. 2005. Monetary Policy, Foreign Exchange Policy, and Delayed Overshooting. Journal of Money, Credit and Banking, 37(4), 775-782 • Bouakez, H. and M. Normandin. 2010. Fluctuations in the foreign exchange market: How important are monetary policy shocks?. Journal of International Economics, 81, 139-153 Key Marking criteria will include: • Initiative: originality, innovativeness of answer • Assignment Structure: clarity of aims, objective, structure and presentation • Quality of Writing: Readability and ability to convey key message(s) concisely • Derivation Analysis: Accuracy and Completeness of model derivation • Model Understating: Understanding and Comprehensiveness of theoretical models • Quality/Scope of Literature Review: Understanding of established knowledge • Suitability of Literature: Use of suitable sources, focused to answer key research aims • Literature Analysis: Quality/level of analytical skill demonstrated • Insightfulness of Analysis: Interest and usefulness of findings, conclusions drawn. • Understanding: Assignment demonstrates students have understood key topics • Overall Quality of Assignment blackboard.swan.ac.uk