Chapter 9: Int'l Monetary Policy Flashcards
Length of gold standard use
1870 to 1914
Why are there incentives to cooperate for mutual gain?
Exchange rates represent the relative value of currencies
Money’s social functions
- social role of money
- medium of exchange
- store of value
- unit of account
Exchange rate
Price of a national currency relative to other national currencies
What happens when the dollar goes up in value against another currency
the dollar appreciates/strengthens
Why does the exchange rate fluctuate?
In response to changes in supply and demand
What do governments aim to effect through manipulating monetary policy?
Macroeconomic conditions (inflation, unemployment, rate of economic growth)
Undervalued currencies
- attract foreign investors
- help a country export
- make imports more expensive
- improve trade deficits
Overvalued currencies
- boost consumer purchasing power abroad
- may lead to trade deficits
Who favors fixed/pegged rates?
Countries with developing economies and those that rely heavily on foreign trade
Who favors floating rates?
Countries with stable economies
International monetary regime purpose
Help facilitate international economic exchange
The three kinds of benchmarks
- commodity standard
- commodity backed paper currency
- national paper currency standard
What contributed to the collapse of the international economy in the 1930s?
the post-Great Depression governments trying floating exchange rates based on paper national currencies; it caused volatility and instability
Bretton Woods System
1945-1973, post WWII monetary system that was organized around the dollar that was tied to gold at $35 per ounce
What did the BW system rely on?
collaboration from its members
What is today’s system based on?
Floating exchange rates among a few major currencies
What does this system depend on?
the major national governments to work together, especially in times of crisis
Why did EU want a regional monetary arrangement?
It was after BW collapsed
What currency was the EU exchange rate originally pegged to?
German Deutsche mark
Why did EU members defect this in the 1990s?
GER raised its interest rates high
What did the ECB do in response to this raise?
Establish the euro! Bye bye Deutsche mark
What was the agreement between GER and the ECB?
- ECB HQ in Frankfurt
- GER has less currency volatility in Europe
- Euro was connected to many different cooperative projects by the EU
When was the euro adopted?
2002 (GBR and Sweden don’t use although they are in the EU)
A typical currency crisis
- a government is committed to a fixed exchange rate but faces pressure to devalue the currency
- creates unease about the credibility of the government’s commitment
Contagion
Uncertainty about one country can feed uncertainties about others
What do currency crises usually cause?
Even broader financial and economic difficulties
Is the international monetary regime a public good?
YES!!!!!!
