In the book "" by Mankiw and Taylor the demand also and also supply curves on the foreign-currency exchange sector are presented as follows:


The supply equates to the Net Capital Outcirculation (NCO). I would certainly have actually assumed that the exchange rate influences NCO in the very same way it impacts imports and exports, for instance a greater exchange rate renders it more profitable to invest abroad than domestically, leading to an raised NCO. However, the supply isn"t affected at all by the exreadjust rate according to Mankiw and Taylor and that"s what I don"t understand.

You are watching: In an open economy, why is the supply curve in the foreign-currency exchange market vertical?



Due to the fact that the supply of pounds in the model is controlled and resolved by the central financial institution. The main financial institution does not need to readjust (increase) the supply of pounds as soon as the exreadjust rate transforms. So the supply of pounds will certainly be just a flat vertical line because no matter what the exreadjust rate is the supply of pounds will certainly not respond to exchange rate as it is offered by the central bank"s monetary plan.


The authors assume that the capital outflow is exogenous, i.e. not impacted by the present exchange rate. Here"s why (from a U.S. allude of view): If I want to invest money in Mexico, then I want to understand how a lot money I acquire earlier after one year. That is identified by: the rate of rerevolve in Mexico (in pesos); and also exactly how much the peso/$ price transforms. Regarding the last, it does not matter what the current exreadjust rate is; what matters is exactly how a lot it will certainly readjust in the coming year.

Of course, no one deserve to predict exreadjust rate changes (similarly a rate of rerevolve commonly can"t be predicted, other than for safe bonds). But those aren"t relevant, bereason your chart ssuggest reflects that resources flows are not a function of the present exchange price.

Thanks for contributing a solution to Stack Exchange!

Please be certain to answer the question. Provide details and share your research!

But avoid

Asking for help, clarification, or responding to various other answers.Making statements based upon opinion; earlier them up through recommendations or individual experience.

Use MathJax to format equations. MathJax referral.

See more: Going Stag: What Does It Mean To Go Stag Means And How To Own It

To learn even more, watch our tips on creating great answers.

Post Your Answer Discard

By clicking “Blog post Your Answer”, you agree to our terms of organization, privacy policy and cookie plan

Not the answer you're looking for? Browse other concerns tagged supply-and-demand open-economy-macro foreign-exreadjust nonprofessional or ask your very own question.


site style / logo © 2021 Stack Exchange Inc; user contributions licensed under cc by-sa. rev2021.9.2.40142

Your privacy

By clicking “Accept all cookies”, you agree Stack Exchange deserve to store cookies on your tool and also discshed indevelopment in accordance through our Cookie Policy.