The problem of exchange rate expectations

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Expectations about the future exchange forexrebatenetwork Whatisforexrebate another major factor affect What is forex rebateg the exchange rate Here expectations can be divided into two levels First, in the previous analysis of the impact of changes in the money supply on the exchange rate in the short term, we assumed that the price level remains unchanged despite the changes due to the money supply This assumption, not very realistic because the prices of commodities, which change every day, have There are many commodities whose prices are formed through contracts, for example, supply contracts between manufacturers, where prices remain constant in the short run cashback forex workers wages do not change in the short run In developed countries, wage costs account for a large proportion of commodity prices, and thus we can reasonably assume that the price level in a country remains constant in the short run despite changes in the money supply However Although the price level remains constant in the short run due to contracts, it brings pressure to make the price level increase in the future with pressure comes expectations: the price level is expected to rise with expectations and without expectations the results are different, taking the dollar as an example: without expectations, Ms↑→↓R→↓$ (currency devaluation); with expectations, Ms↑→↑expected price level→expected exchange rate devaluation↓ Thus, it is shown that in the presence of inflationary pressures and expected inflation, the increase in the money supply leads to the depreciation of the dollar consists of two components: one is caused by the decrease in the bestforexrebate rate and the other is caused by the expectation of inflation Obviously, when there is an expectation of inflation, the depreciation of the dollar is somewhat greater The second level at which the effect of expectations on the exchange rate occurs is the one we discussed earlier: a countrys interest rate But here the relationship between interest rate changes and exchange rate changes is not so simple, the effect of interest rates on the exchange rate will also depend on the reasons for the changes in interest rates, because different reasons can lead to different results. Now lets analyze two examples. First, suppose that according to the current economic situation in the country, people analyze that the central bank may increase the money supply in the near future, so the inflation expectations appear. At this point, the money supply does not actually increase, but the price level has risen, which causes the actual money supply to decrease instead, and the interest rate to increase. But at this point, because people expect the general price level (including the price of money) to rise, the actual purchasing power remains the same, which is the depreciation of the currency. As a result, the interest rate rises due to inflationary expectations, but it does not make the currency appreciate, but rather depreciates it Second, suppose the interest rate rises because of the fall in inflation expectations, or the rise in the real interest rate This is when if the central bank reduces the money supply, it will lead to a rise in the interest rate, and at the same time, people expect inflation to decrease This is when the real interest rate in the money market re = RAπe must rise due to the rise in the interest rate R and the fall in the expected inflation rate πe, prompting the appreciation of the currency These two examples show that in the foreign exchange market, a rise in the nominal interest rate due to an increase in the expected inflation rate causes the currency to depreciate and, conversely, an increase in the nominal interest rate due to a fall in the expected inflation rate (and the consequent rise in the real interest rate) causes the currency to appreciate

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