Macroeconomic Policy and. 1/25/12: Definitions & Accounting

Transcription

1 Public Affairs 854 Macroeconomic Policy and International ti Financial i Regulation 1/25/12: Definitions & Accounting Prof. Menzie Chinn La Follette School of Public Affairs Spring 2012

2 Concepts/Definitions GDP Real versus nominal Price level, inflation Money Interest rates

3 GDP Sum of value of all goods and services produced within a given time period (usually a year or a quarter) If quarterly, usually adjusted up to yearly rates GDP = C + I + G + (Ex Im) All these are final goods and services

4 Real vs. Nominal Nominal values are expressed at values recorded. GDP is just all the values of items spent on, added up. Real values control for the general price level, to get in principle quantities. Nominal Value/Price index = Real Quantity Nominal Price/Price index = Relative Price

5 Nominal vs. Real 16,000 15,000 14,000 GDP, SAAR, in bns. GDP 13,000 GDP (Ch.2005$) 12,000 11,000 10, , GDP GDP05

6 Relative Price (of Oil) Oil price, WTI 2010$/bbl $/bbl OILPRICE OILPRICE/(CPILFESL/ )

7 Price Level vs. Inflation Let P = price level Inflation = percent rate of change of price level Standard definition: π t = (P t P t-1 )/P t-1 (on annual basis) Sometimes, a continuously compounded definition is used: π t = ln(p t )-ln(p t-1 ) Standard variables: CPI, core CPI, PCE

8 Price Levels 6 5 CPI PCE defl 4 Core CPI 3 2 Core PCE defl

9 Inflation: Total vs. Core Inflation, m/m annualized CPI Core CPI (CPIAUCSL/CPIAUCSL(-1))^12-1 (CPILFESL/CPILFESL(-1))^12-1

10 Inflation: Exact vs. Log Approx Exact [right axis] Approx. [right axis] Exact-approx [Left axis] (CPIAUCSL/CPIAUCSL( 1))^12 1 LOG(CPIAUCSL/CPIAUCSL( 1))*12 (CPIAUCSL/CPIAUCSL(-1))^12-1-LOG(CPIAUCSL/CPIAUCSL(-1))*12 (CPIAUCSL/CPIAUCSL(-1))^12-1 LOG(CPIAUCSL/CPIAUCSL(-1))*12

11 Inflation: M/M vs. Y/Y CPI inflation, annualized y/y m/m (CPIAUCSL/CPIAUCSL( 1))^12 1 (CPIAUCSL/CPIAUCSL(-1))^12-1 (CPIAUCSL/CPIAUCSL(-12))^1-1

12 Nominal Interest Rates 10 8 Ten year Treasurys Fed funds Interest Three month rates, in % Treasurys FEDFUNDS TB3MS GS10

13 Real Interest Rates TIPS 10 year 2 1 Ten year Treasury rate adjusted by expected inflation

14 Accounting, Exchange Rates Balance of payments accounting Exchange rates Foreign exchange markets

15 Balance of Payments Accounting CA + KA + ORT 0 current a/c private financial a/c official financial a/c CA TB + transfers + net income TB EX - IM ORT is changes in holdings of central banks, monetary authorities

16 Source: CEA, ERP 2004.

17 U.S. Current Account Source: Economic Indicators, Dec. 2011

18 Financial Account Source: Economic Indicators, Dec. 2011

19 Definitions Exchange rates: number of home currency units required to purchase one unit of foreign currency; also price of foreign currency. E.g., from EU resident perspective: /$, / E.g., from Chinese resident perspective: Ұ/$

20 Example: $/ EXUSEU

21 Example: / 1/(EXUSEU*EXJPUS)

22 The Value of the Dollar (vs. Euro, Trade Weighted basket [major, broad]) M02=1 0.9 $ index (broad) 0.8 $ index (major) EUR/USD Source: Federal Reserve Board via FRED II

23 The institutional features of the forex market Average turnover in April 2010 = USD4 trillion per day (vs. 3.3 trillion in 2007) Most trading volume between dealers, next most with financial institutions, next most with non-financials. USD, EUR, JPY, GBP, SFR most important t in turnover. AUD moving up quickly.

24 Trends in FX Turnover Source: BIS, Triennial Central Bank Survey: Report on global foreign exchange market activity in 2010 (Nov. 2010).

25 Definitions of Terms Spot transaction: single outright transaction involving the exchange of two currencies at a rate agreed on the date of the contract for value or delivery. Outright forward: transaction involving the exchange of two currencies at a rate agreed on the date of the contract for value or delivery at some time in the future Foreign exchange swap: transaction which involves the actual exchange of two currencies (principal amount only) on a specific date at a rate agreed at the time of the conclusion of the contract, and a reverse exchange of the same two currencies at a date further in the future at a rate agreed at the time of the contract.

26 Definition of Terms (cont d) Currency swap: contract which commits two counterparties to exchange streams of interest payments in different currencies for an agreed period of time and to exchange principal amounts in different currencies at a previously agreed exchange rate at maturity. Currency option: Option contract that gives the right to buy or sell a currency with another currency at a specified exchange rate during a specified period. Forward rate agreement (FRA): interest rate forward contract in which the rate to be paid or received on a specific obligation for a set period of time, beginning at some time in the future, is determined at contract initiation.

27 Definition of Terms (cont d) Interest rate swap: agreement to exchange periodic payments related to interest rates on a single currency. Interest rate option: option contract that gives the right to pay or receive a specific interest t rate on a predetermined d principal for a set period of time.

28 FX Turnover Source: BIS, Triennial Central Bank Survey: Report on global foreign exchange market activity in 2010 (Nov. 2010).

29 FX Trading Centers

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31 Time series: geographical dist n Source: BIS, TriennialCentral Bank Survey: Report on global foreign exchange market activity in 2010 (Nov. 2010).

32 Central bank holdings of reserve currencies USD DEM EUR.1.0 JPY Source: Chinn and Frankel, in International Finance (2008)