ĐỀ tài THUYẾT TRÌNH môn ANH văn HOW DO LOAN INTERESTS AFFECT FOREIGN INVESTORS

We can divide “effects of interest rate on foreign investors” into 2 areas: price effect and income effect: a Price effect:  As real interest rates are reduced, domestic financial and c

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MÔN ANH VĂN

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HOW DO LOAN INTERESTS AFFECT FOREIGN

INVESTORS?

LỚP KINH TẾ TÀI CHÍNH NGÂN HÀNG K9

NHÓM 1

Tháng 11/2010

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1 Nguyễn Thị Kiều An 0909785850 Ntka29@yahoo.com

2 Nguyễn Văn Chiến 0972613369 Chiennguyen39@gmail.com

3 Dương Thị Thùy Dung 0919513211 Boo229@gmail.com

4 Lê Doãn Cương 0918151161 Ledoancuong@gmail.com

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We can divide “effects of interest rate on foreign investors” into 2 areas: price effect and income effect:

a) Price effect:

 As real interest rates are reduced, domestic financial and capital assets become less attractive as a result of their lower real rates of return

& Foreigners will reduce their positions in domestic bonds, real

estate, stocks and other assets The financial account (or balance on capital account) will deteriorate (làm giảm giá tri) as a result of foreigners holding fewer domestic assets

 With no government intervention (sự can thiệp), the financial account and the current account must sum to zero As the financial account declines, the current account will be expected to improve by an equal amount In other words, the balance of trade should improve The country's export will have become relatively cheaper and imports will be relatively more expensive

& The result is foreign investors don’t want to invest in the country.

 The price effect of an expansionary monetary policy (or interest rate decrease policy) is to lower the exchange rate (VND to USD), weaken the financial account and strengthen the current account (a more positive, or a less negative balance of trade)

& Foreign investors tend to decrease their investment in the country

 A restrictive monetary policy (or interest rate increase) would be expected to result in the opposite: a higher exchange rate, a stronger financial account and a weaker current account (a more negative, or a less positive balance of trade)

& Foreign investors tend to increase their investment in the country

a) Income effect:

Interest rates can motivate foreign investors to move investments from one country to another, and therefore from one currency to another Higher interest rates in the United States will, all other things remaining constant, prompt an increase in the value of the dollar Conversely, lower interest rates will cause the dollar to lose value

By increasing interest rates, a nation can increase the desire of foreign investors to invest in that country The logic is identical to that behind any investment: The investor seeks the highest risk-adjusted returns possible By increasing interest rates, the returns available to those who invest in that country

increase Consequently, there is an increased demand for that currency in order

to be able to invest where the interest rates are higher

When interest rates increase, though, foreign investment can increase because people outside of the country want a larger return for their investment and they are more likely to get it in a state of high interest rates

Although much of it is contained within consumers' perception of the economy and their income, interest rates can drive up consumer spending, investment and the amount of loans people take out of the bank Or they can increase foreign investment

Investors can choose to invest in stocks or bonds, and their investment choice is based on the expected returns of each investment For example, suppose that the Fed decides to lower interest rates When interest rates are lowered, bonds are issued with a lower interest rate As a result, investors will realize they can earn more money by investing in stocks, and they will do so When more people choose to invest in stocks, stock prices will start to rise Similarly, when the Fed decides to raise interest rates, bonds will be issued with a much higher interest rate This will encourage investors to purchase bonds, and as investors sell their stocks, stock prices will fall

With a program of expansionary (easy) monetary policy, regarding to the income effect:

 The domestic GDP will rise (driven by increasing in investment) The rise in domestic GDP will tend to increase the demand for imports The increase in imports will cause the current account to deteriorate The increase in imports purchased will increase the need to convert domestic to foreign currency As

a result, the exchange rate of the domestic currency will decrease

& Foreign investors tend to decrease their investment in the country

 With no government intervention, the financial account must now move toward a surplus as the financial and current account must sum to zero Due

to the increase in imports, foreigners will now have a surplus of the their own currency

& If foreigners do not use that currency to purchase the country's

exports (which would improve the current account balance), they will ultimately need to invest that currency in the assets of the domestic country

 We should note that investors can buy and sell financial assets such as stocks and bonds more quickly than producers and consumers can sell and buy physical goods So initially, price effects of interest rate would be expected to dominate (chi phối) An unanticipated (không dự kiến trước, bất ngờ) increase of interest rate (and of the money supply) will cause the exchange rate to go down, the financial account to weaken and current account to gain strength Over time, the income effect will come into play and will cause both the trade balance and financial account to weaken

On the other hand, for an economy with a foreign sector, monetary policy can create cyclical (có tính chu kỳ) movements that tend to destabilize (làm mất

ổn định) an economy Unanticipated expansionary monetary policy initially causes the trade balance to improve, but as time progresses, it causes the trade balance to become more negative It initially causes the capital account

to weaken due to lower interest rates, but then later tends to improve it In the long run, the main effect of the expansionary monetary policy is a lowering of the nation's currency exchange rate, which is the international equivalent to the long-run effect of expansionary monetary policy, inflation Empirical evidence indicates that countries with high rates of monetary supply growth experience both inflation and declining currency exchange rates An important point to consider is the exchange rates of two countries - their relative rates of money supply growth will help determine how the exchange

Fiscal policy changes will produce both price (substitution) and income effects for exchange rates and balance of payments Suppose government policymakers enact a program of unanticipated fiscal stimulus This would be expected to cause the following sequence of events to occur with regard to

·Greater government budget deficits caused by tax cuts and/or increased spending will increase the demand for investable funds, which will cause interest rates to rise

·The increase in interest rates will cause capital inflows (foreigners will purchase more domestic financial assets) As a result, the capital account will strengthen (become more positive or less negative)

·Foreign investors will need to exchange their currency for the domestic currency The increased demand for the domestic currency will cause its

exchange rate to increase.

·If there is no government intervention with the balance-of-payments, the current account will need to become more negative (or less positive) The trade balance will weaken as imports increase and/or exports decrease This makes sense because the strengthening of the nation's currency will make its exports relatively less attractive to foreigners and imports will be less expensive relative to the country's consumers and domestic businesses

To summarize, the price effect of a stimulative fiscal policy is to raise the value of the domestic currency, strengthen the capital account and weaken the current account A restrictive fiscal policy would have the opposite effects: a weaker domestic currency, a weaker capital account (there would

be net capital outflows) and a stronger current account

With a program of fiscal stimulus, the following sequence of events would be expected to occur with regard to the income effect:

·The tax cuts and/or increase in government spending associated with the fiscal policy, and the associated multiplier effect, will increase GDP

·The rise in GDP will cause the demand for imports to increase and the current account will be weakened (become more negative or less positive)

·More domestic currency will need to be converted into foreign currencies to purchase the increased quantity of imports The increased supply of domestic currency on the international markets will cause the exchange rate to decline

·With no government intervention, the financial account will need to become more positive (or less negative) in order to compensate for the weakening of the current account Foreigners will be holding more of the domestic currency and are therefore in a position to purchase more of the nation's financial assets Also, as the domestic economy is improving, they may find it more attractive as a place to invest

To summarize, the income effect associated with fiscal stimulus will tend to lower the exchange rate of the country's currency, weaken the current account (trade balance) and strengthen the financial account Fiscal policy price and income effects move in the same direction with regard

to their impact on the financial and current accounts Stimulating fiscal policy

will clearly weaken the current account (balance of trade) and strengthen the capital account Restrictive fiscal policy will strengthen the current account (balance of trade) and weaken the capital account

The impact of fiscal policy on exchange rates is not so clear because the price and income effects work in opposite directions The income effect tends to weaken the currency exchange rate, while the price effect will tend to strengthen the currency exchange rate Because foreign investors can trade financial assets (such as stocks and bonds) more quickly and easily than consumers and producers can alter the purchase and sale of physical assets, the price effect would be expected to have the larger initial effect Over time, the income effect will increasingly come into play

So initially, the fiscal stimulus should cause the domestic currency to appreciate Over time, as the demand for imports is stimulated, the domestic currency will weaken If the fiscal stimulus is associated with inflation, there will be a further weakening of the domestic currency Note that the fiscal stimulus will also have the effect of worsening the balance of trade and increasing the financial account in both the short and long run

A stimulative fiscal policy is good for the economy when it is operating below full employment levels There are a couple of factors that will mitigate the positive effects One factor is that government deficits will work to increase interest rates, which can crowd out private investment Another factor is that after foreign capital comes in (due to higher interest rates), the domestic currency exchange rate rises This leads to a rise in imports, which reduces GDP These two factors lessen the positive effects of fiscal policy stimulus

TÀI LIỆU THAM KHẢO

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& PGS.TS Nguyễn Văn Tiến – Tài Chính Quốc Tế – NXB Thống

Kê - 2010

& Trang web www.articlesbase.com

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