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International monetary trade ecn 606 > Chap 8 > Flashcards

Chap 8 Flashcards

1
Q

What is Nominal anchors by a government ?

A
  • It is the promise by the government to ensure certain monetary policy outcome in the long run
  • money target , ER target , inflation target
  • It nor complete guarantee
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2
Q

How did the world react to the collapse of Bretton Woods system ?

A
  • Most advance countries : Float monetary policy and preserve their autonomy

( The European try to preserve a fix system between themselves )

  • Some developing countries maintained capital controls, but many opened up their markets
  • Few (general) : dirty floats or peg with limited flexibility
  • A really small number still impose capital control
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3
Q

What is the meaning of the term “original sin” ?

A
  • It refers to a country’s inability to borrow in tis own currency
  • Periods of high inflation (or variable) can diluted the real value of a debt , therefore creditors only wanted to lend in a foreign stable currency
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4
Q

what is an inflation tax ? (seigniorage)

A
  • The source of revenue is an inflation tax levied on the members of the public who hold the money

Assets = all money

assets (same) = public money + printed money

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5
Q

what is the Nth currency problem ?

A
  • It is the political effect of the asymmetry shock, which can be resolve with “Cooperative arrangement”
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6
Q

Why economic integration and economic similarity are need in a economic union ?

A
  • Both are need because the lack of one may disrupt negatively on country and not the other
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7
Q

What is the meaning of the term “fear of floating”?

A
  • It describe countries that may be less willing to allow their ER to float.

The reasons are:

  • A fixed ER may be the last way to avoid large fluctuation in external wealth
  • A fixed ER , may be the only transparent and credible way to attain and maintain a nominal anchor

(specially for countries with weak institutions and poor reputation )

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8
Q

Floating vs fixed :

Britain vs europe (france)

A
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9
Q

Do fixed ER promote trade ?

A
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10
Q

The trilemma in action :

( open-pegged, open not pegged and closed )

Effects according to each

A
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11
Q

what is more volatile in fix exchange rate (country depend )

A
  • The output become volatile
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12
Q

Correlation between wealth and real output:

(ER crisis - depreciation)

A
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13
Q

Argument in favour of fixed exchange rate (security)

A
  • Prevent the government to print money to monetize the government deficit

(increasing the money supply and inflation )

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14
Q

What is the difference between economic integration and economic similarity ?

A
  • Economic integration: the growth of market linkages in goods, capital, and labor markets among regions and countries.
  • Economic similarity, measured by similarity of shocks
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15
Q

ER depreciation and changes in wealth

A
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16
Q

other name for non-cooperative fixed ER system?

A
  • Beggar-thy-neighbor policy

Home can improve its position at the expense of foreign policy

17
Q

What is the main lesson with relation to fiscal discipline (fixed ER) and inflation ?

A
  • It appears that fixed ER are NEITHER necessary nor sufficient to ensure good inflation performance.
  • The exception appears to be in developing countries, where ER peg may be the only credible anchor
18
Q

Measures of “Original Sin”

A
19
Q

what is the most important characteristic is a fixed ER system?

A
  • It involve multiple countries

(Bretton woods and ERM - European ER mechanism )

20
Q

What is the main lessons of Asymmetric shock ?

A
  • The country with unilateral peg (asymmetrical) will lose output.
21
Q

How the ER changes affects national wealth if foreign currency liabilities exceed foreign currency assets ?

A
  • The country experiences a DECREASE in wealth when the ER DEPRECIATE
22
Q

Inflation Performance and ER regime

A
23
Q

Solutions for the Trilemma

A
  1. Opt for open markets, with fixed exchange rate ( “Open Peg”)
  2. Opt to open its capital market but allow the currency to float ( “open nonpeg”)
  3. Opt tp close its capital markets (“closed”)
24
Q

Output cost of Fixed ER

A
25
Q

How the ER changes affects national wealth if currency assets exceed foreign currency liabilities ?

A
  • The country experiences an INCREASE in wealth when the ER DEPRECIATE
26
Q

What was the sources of divergence that cause the separation if U.K and ERM ?

A
  • The economic objective of each country was different (Britain and Germany), because each country faced different type of shock
  • The fiscal shock that Germany experienced after reunification was not felt in Britain or any other ERM country. The dilemma was between economic integration and economic similarity
27
Q

what is a currency mismatch ?

A
  • When a foreign currency external assets do not equal foreign currency external liabilities

International monetary trade ecn 606 (9 decks)

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