International settlement first review

International Settlement FIRST REVIEW Dr. Nguyen Minh Duc Dr Nguyen Minh Duc 2009 2 Capital movement  Capital market of country A has its demand curve of D and interest r on the left side  Capital market of country B has its demand curve of D* and interest r* on the right side  Suppose A has 30 mil. USD in its capital, B has 10 mil. USD, represented by the relative supply curve S/S*  Interest rate in A is 4% and in B is 12%. Thị trường vốn thế giới r 4% 8% 12% r* 20 30 0*0 K*K S/S* DD* Dr Nguyen Minh Duc 2009 3 Capital movement  With mobilized capital flow between 2 countries, the interest rates in the two countries will approach to their equilibrium at 8% Thị trường vốn thế giới r 4% 8% 12% r* 20 30 0*0 K*K S/S* DD* Dr Nguyen Minh Duc 2009 4 Question How the free trade and globalization affect the Vietnamese capital market? Dr Nguyen Minh Duc 2009 5 Balance of Payment BOT + TS BGS + NII CA + KA = BOP DI + PI Dr Nguyen Minh Duc 2009 6 Balance of Payment – cont. BOT (Balance of Trade) + TS (Trade in Services) = BGS (Balance of Goods and Services) NII = Net Investment Income CA (current account) = BGS + NII KA (capital account) = DI + PI  KA: capital account  DI: direct investment:  PI: porfolio investment Dr Nguyen Minh Duc 2009 7 Depreciation and BOT  BOT = Px.Qx – e.P*m.Qm  Marshall-Lerner condition If |Ɛex – Ɛim| > 1, BOT increase with the depreciation of domestic currency. Dr Nguyen Minh Duc 2009 8 J-curve Dr Nguyen Minh Duc 2009 9 Question How difference between fixed and floating exchange rates?