http://www.economist.com/news/business-and-finance/21689694-bank-japan-gingerly-

Question

http://www.economist.com/news/business-and-finance/21689694-bank-japan-gingerly-joins-ranks-central-banks-penalising

How does the article author's argument connect to or contradict with the asset approach to exchange rates, monetary approach to exchange rates, reserves, and/or the central bank balance sheet model? Is/are the model(s) relevant or not for this particular case?

(i.e. use one or more of the models we have seen as the model the author possibly has in the back of his/her mind to make his/her argument, or explain how the argument the author is making is contradictory to a model we have seen)

(the models I mention above are described in this textbook: https://www.chegg.com/homework-help/international-macroeconomics-2nd-edition-solutions-9781429241038?trackid=JXwLdQt7)

Explanation / Answer

The given Article said about the The Japan facing the negative interest rates. The Japan facing the interest rate is below zero. That is negative. Now most of the countries take the positive side of negative interest rates for their economic well being. Examples are, Japan, US,etc. The policy of negative interest rate is that the Bank charges negative interest on bank reserves, or bank reserves is the minimum requirements. This policy is lowering market interest rates and reducing the capital inflows. This will reduce the pressure of exchange rates.

When there is negative interest rates the people are will to to save the money.So there is less demand for Japaneese Yen in the world market. So the lower interest rates the export will be more competitive and import will be expensive. This will increase the aggregate demand for the country.

So this connect with the monetory approach of exchange rate determination. The monetory approach of exchage rate determination means that the demand for money is equals supply of money.

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