Kế toán An An

GROUP 7

EXCHANGE
RATES IN THE
SHORT RUN
 MEMBERS
21O5O393 VŨ THỊ BẢO CHI

21050565 ĐOÀN THỊ HÀ VY

21050449 NGUYỄN NGỌC KHÁNH

21050386 NGUYỄN HẢI CHÂU

21050518 TRẦN THỊ THÚY PHƯƠNG

TABLE OF CONTENT
I. SUPPLY AND DEMAND ANALYSIS

II. EXPLAINING CHANGES IN

EXCHANGE RATE

III. CHANGES IN THE EQUILIBRIUM

EXCHANGE RATE: TWO EXAMPLES

IV. FOREIGN EXCHANGE RATE IN

SHORT RUN IN VIET NAM
I. SUPPLY AND DEMAND ANALYSIS
The key to understanding the short-run behavior of exchange rates is to
recognize that an exchange rate tells us the price at which domestic
assets trade for foreign assets

The exchange rate is the price of one asset in terms of another, the
natural way to investigate the short-run determination of exchange
rates is to use an asset market approach that relies heavily on the theory
of asset demand developed.

In the past, supply and demand approaches to exchange rate

determination emphasized the role of import and export demand. The
more modern asset mar- ket approach used here emphasizes stocks of
assets rather than the flows of exports and imports over short periods
I. SUPPLY AND DEMAND ANALYSIS
Decisions to hold domestic or foreign assets play a much greater role in
exchange rate determination than the demand for exports and imports
does.

Response of the
Factor Change in factor
Exchange Rates, E*

Domestic price level increase decrease

Trade barriers increase increase

Import demand increase decrease

Export demand increase increase

Productivity increase increase

 The quantity of dollar assets supplied is
1.1 Supply primarily the quantity of bank deposits,
bonds, and equities in Canada and for all

Curve for practical purposes we can take this

amount as fixed with respect to the
exchange rate. The quantity supplied at
Domestic any exchange rate does not change, so
the supply curve, S, is vertical, as shown
Assets in Figure 19-3.
I.2 Demand Curve for Domestic Assets

The demand curve traces out the

quantity demanded at each current
exchange rate by holding everything
else constant, particularly the expected
future value of the exchange rate.

The greater the expected rise

(appreciation) of
the dollar, the higher is the relative
expected return on dollar (domestic)
assets.
 I.3 EQUILIBRIUM IN THE
FOREIGN EXCHANGE MARKET

The market is in equilibrium when the quantity

of dollar assets demanded equals the quantity
supplied
II. EXPLAINING CHANGES IN EXCHANGE RATE
1. Shifts in the Demand for Domestic Assets

DOMESTIC INTEREST RATE, iD

An increase in the domestic interest

rate iD shifts the demand curve for
domestic assets, D, to the right and
causes the domestic currency to
appreciate (E ).

A decrease in the domestic interest

rate iD shifts the demand curve for
domestic assets, D, to the left and
causes the domestic currency to
￬
depreciate (E ).
II. EXPLAINING CHANGES IN EXCHANGE RATE
FOREIGN INTEREST RATE, IF

An increase in the foreign interest

rate iF shifts the demand curve D to
the left and causes the domestic
currency to depreciate . The
exchange rate declin

A fall in the foreign interest rate iF

shifts the demand curve D to the right
and causes the domestic currency to
appreciate. The exchange rate rises.
 II. EXPLAINING CHANGES IN EXCHANGE
I.2 Demand Curve for Domestic AssetsRATE
A rise in the expected future
exchange rate, E e shifts
t+1
the demand curve to the
right and causes an
appreciation of the domestic
CHANGES currency.
IN THE
EXPECTE
D FUTURE
EXCHANG
E RATE, A fall in the expected future
e e

E t+1 exchange rate, E , shifts

t+1
the demand curve to the left
and causes a depreciation of
the domestic currency
II. EXPLAINING CHANGES IN EXCHANGE RATE

Similarly, the other long-run determinants of the exchange rate, the following
changes, all of which increase the demand for domestic goods relative to foreign
goods( shift the demand curve to the right), will raise the expected future
e
exchange rate, E t+1
Expectations of a fall in the domestic price level relative to the foreign price
level
Expectations of higher domestic trade barriers relative to foreign trade
barriers
Expectations of lower domestic import demand;
Expectations of higher foreign demand for domestic exports
Expectations of higher domestic productivity relative to foreign productivity.
2. Recap:
Factors That
Change the
Exchange
Rate
III. CHANGES IN THE EQUILIBRIUM
EXCHANGE RATE: TWO EXAMPLES

The response of the exchange rate to changes in interest

rates and money growth.

 III.1 CHANGE IN INTEREST RATE

D
The Fisher equation indicates that the interest rate i can change
for two reasons: Either the real interest rate i r changes or the
expected inflation rate changes. The effect on the exchange rate
is quite different, depending on which of these two factors is the
source of the change in the nominal interest rate.
III.1 CHANGE IN INTEREST RATE

Real interest rate

D
The increase in the nominal interest rate i
increases the relative expected return on
dollar assets, increases the quantity of
dollar assets demanded at each level of
the exchange rate, and shifts the demand
curve to the right.

When domestic real interest rates rise,

the domestic currency appreciates.

Figure 19-7. Effect of a rise in the domestic interest

rate as a result of an increase in expected inflation
III.1 CHANGE IN INTEREST RATE

Expected inflation
The rise in expected domestic inflation leads to
a decline in the expected appreciation of the
dollar, which is typically thought to be larger
than the increase in the domestic interest rate
D
i

The relative expected return on domestic

(dollar) assets falls, the demand curve shifts to
the left

Figure 19-7. Effect of a rise in the domestic interest

rate as a result of an increase in expected inflation
III.1 CHANGE IN INTEREST RATE

Expected inflation

When domestic interest rates rise due to an expected

increase in inflation, the domestic currency depreciates.
Because this conclusion is completely different, we must
always distinguish between real and nominal measures when
analyzing the effects of interest rates on exchange rates.
III.2 Change in the money supply

The higher money supply will lead to a higher Canadian price

level in the long run and hence to a lower expected future
exchange rate.

The resulting decline in the expected appreciation of the dollar

lowers the quantity of dollar assets demanded at each level of the
exchange rate and shifts the demand curve to the left. In addition,
the higher money supply will lead to a higher real money supply
M/P
III.2 Change in the money supply

The resulting rise in the real

money supply causes the
domestic interest rate to fall,
which also lowers the relative
expected return on dollar assets,
providing a further reason why
the demand curve shifts to the
left

A higher domestic money supply

causes the domestic currency to
depreciate.

Figure 19-8. Effect of a rise in the money supply

IV. FOREIGN EXCHANGE
RATE IN SHORT RUN IN
VIET NAM
Forex
market in
Vietnam
MARKET'S CHARACTERISTICS OF
VIETNAM FOREX MARKET
The forex market in Vietnam displays a number of characteristics
commonly associated with developing-country forex markets
including:
Small volume of transactions;
Limited role of interbank trading
High degree of market concentration;
Dominant role of spot transactions and transactions involving
local counterparties only.
 WHO IS THE
BIG DEALER IN
THE FOREX
MARKET ?
The number of banks that have participated
actively in the market has remained relatively
small. They include the four large state-owned
commercial banks, foreign bank branches and
some joint-stock commercial banks.
- Among the active participants, the Bank for Foreign
Trade of Vietnam (Vietcombank) has generally
assumed the position of the leading commercial bank
in the forex market.
- During the period 1994-1999 this bank was the
dominant private-sector player in the interbank
market, with a market share of up to 90 percent, and
operated to a large extent under close 'guidance'
from the SBV.
Vietcombank's market share has been
reduced in more recent years -its share of the
total volume of local forex transactions
around now 30 to 40%.
Vietnam's intervention in FX Market
Vietnam through the State
Bank of Vietnam - tightly
manages the value of the VND,
- particularly against the USD,
and the State Bank of Vietnam
intervenes in FX markets
through reserves accumulation
and decumulation to maintain
the exchange rate that it sets.
IMF data indicate that
Vietnam's foreign currency
reserves rose from just
under $49 billion at the end
of 2017 to slightly more than
$88 billion by September
2020.
The official said that since the beginning of
2022, the international market has developed
complicatedly and unexpectedly, negatively
affecting the global economic-financial system.

In this context, central banks have tightened

the control over monetary policies and
increased operational interest rates to rein in
inflation, resulting in strong developments in
the financial-monetary market, he noted.

The USD/VND exchange rate has so far

increased by about 2 percent over that at the
end of 2021.
 Since the beginning of this year, the SBV has
sold foreign currencies through suitable
methods, meeting the demand of the economy
and maintaining the VND liquidity to support
the VND interest rate stability, thus assisting
the socio-economic recovery and development
process, said Quang.
According to the bank, the 2 percent rise in
USD/VND exchange rate since the end of 2021
is suitable to the conditions and development
of the domestic and foreign markets as well as
 CONCLUSION

In the short run, exchange rates are determined by changes in

the relative expected return on domestic assets, which cause the
demand curve to shift. Any factor that changes the relative
expected return on domestic assets will lead to changes in the
exchange rate. Changes in the money supply lead to exchange
rates overshooting, causing the exchange rate to change by more
in the short run than in the long run.
Fisher equation indicates that the interest rate iD can change
for two reasons: Either the real interest rate ir changes or the
expected inflation rate echanges.
THANKS FOR YOUR
ATTENTION