Chapter 9: Exchange Rate Crises: How Pegs Work and How They Break Flashcards

1
Q

Exchange Rate Crisis

A

A big depreciation

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2
Q

Banking Crisis

A

A crisis of the private sector
If banks and other financial institutions face adverse shocks, they may become insolvent, causing them to close or declare bankruptcy

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3
Q

Default Crisis

A

A crisis of the public sector
If the government faces adverse shocks, it may default and be unable or unwilling to pay the principal or interest on its debts

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4
Q

Twin Crises

A

When two out of the three crises (exchange rate crisis, banking crisis, and default crisis) occur together.

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5
Q

Triple Crises

A

When a banking crisis, a default crisis, and an exchange rate crisis all occur together

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6
Q

Domestic Credit

A

Central bank purchases

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7
Q

Reserves

A

Foreign assets

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8
Q

Central Bank Balance Sheet

A

The balance sheet for the central bank’s assets and liabilities

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9
Q

Assets

A

What is owed to you

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10
Q

Liabilities

A

What you owe

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11
Q

Floating Line

A

Cases in which the central bank balance sheet contains no reserves. It is called so because we assume that they have a floating exchange rate (45 degree line)

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12
Q

Fixed Line

A

A vertical line on the graph. It is so because the money supply is at the level necessary to maintain the peg

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13
Q

Currency Board

A

A fixed exchange rate that always operates with reserves equal to 100% of the money supply

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14
Q

Country Premium

A

Compensation for perceived default risk

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15
Q

Sterilization

A

Refers to the actions taken by a country’s central bank to counter the effects on the money supply caused by a balance of payments surplus or deficit

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16
Q

Insolvent Bank

A

A private bank is insolvent if the value of its liabilities exceeds the value of its assets

17
Q

Bailout

A

Government coming to the rescue of a bank in a damaged state

18
Q

Illiquid Bank

A

An illiquid bank holds some cash, but its loans cannot be sold (liquidated) quickly at a high price and depositors can withdraw at any time.

19
Q

Bank Run

A

If too many depositors attempt to withdraw at once and a bank has insufficient cash on hand, then they are in trouble.

20
Q

Lender of Last Resort

A

If a bank needs a loan to stay afloat but nobody will lend to them, they can turn to the central bank to lend to them

21
Q

Sterilization Bonds

A

Since the central bank is not allowed to borrow, their net domestic assets can be less than zero. Thus, they issue sterilization bonds

22
Q

First Generation Crisis Model

A

A sudden speculative attack on a fixed exchange rate, even though it appears to be an irrational change in expectations, can result from rational behavior by investors. This happens if investors foresee that a government is running an excessive deficit, causing it to run short of liquid assets or “harder” foreign currency which it can sell to support its currency at the fixed rate. Investors are willing to continue holding the currency as long as they expect the exchange rate to remain fixed, but they flee the currency en masse when they anticipate that the peg is about to end.

23
Q

Speculative Attack

A

When investors sell all of their holdings of a particular currency

24
Q

Fiscal Dominance

A

Monetary authorities ultimately have no independence

25
Q

Second Generation Crisis Model

A

Equilibrium changes, which can happen due to multiple equilibria
Doubts about whether the government is willing to maintain its exchange rate peg lead to multiple equilibria, suggesting that self-fulfilling prophecies may be possible, in which the reason investors attack the currency is that they expect other investors to attack the currency.

26
Q

Contingent Commitment

A

The country will peg, but if things get “bad enough,” then the government will let the exchange rate float rather than put the country through serious economic pain.

27
Q

Self-Confirming Equilibrium

A

Combinations of investor beliefs and government actions for which the ex post outcome validates the ex ante beliefs

28
Q

Corners Hypothesis

A

Only float or peg don’t pussy around with all the middle ground shit. Intermediate regimes suck

29
Q

International Monetary Fund (IMF)

A

May lend to countries in difficulty if it thinks they can restore stability in a timely fashion with the help of a loan