Exam Flashcards
fiscal federalism
the ability to transfer economic resources from areas with healthy economies to those suffering economic setbacks.
The risk premium, ρ [what does ρ > 0 impliy about risk?]
The risk premium reflects the difference in riskiness of domestic and foreign bonds. ρ is the extra return investors require on domestic bonds compared to foreign ones due to their difference in risk. If ρ>0, then domestic bonds are considered riskier than foreign ones.
financial account?
What is a posetiv FA?
the financial account, of the balance of payments, records all international purchases or sales of financial assets. The financial account measures the net acquisition of financial assets
Financial account is positive when, on net, a country’s residents are accumulating claims of foreign residents that is buying more financial assets from foreign residents and are being sold to them, or in other words, it has positive net lending to the rest of the world.
Feldstein-Horioka (1980) test of asset trade (what did they argue and what did they find)?
With perfect capital mobility between countries, we would expect to see no relation between a
country’s savings (based on world opportunities) and its investment (based on available world
funding). This is the Feldstein & Horioka argument from 1980. They found however there is a strong relationship between domestic savings and investment, and so concluded the world is far from perfect capital mobility.
My reasoning:
They argued there where perfect capital mobility between countries. But finding a srtong relathionship between domestic savings and investment, concluded that the world is far from perfect capital mobility
Fiscal expansion include?
A positive change in D
CIP?
R= R* + (F-E)/E
UIP?
R= R* + (Ee-E)/E
q = ?
EP*/P
Reasons why an excessive current account surplus would be a problem for a country:
i. With a given amount of saving, a higher current account surplus implies lower
investment in domestic plant and equipment (since S = CA + I).
ii. If the excessive current account surplus reflects excessive external borrowing by
foreigners, the home country may in the future find itself unable to collect the money it is
owed.
iii. Excessive current account surpluses may be inconvenient for political reasons, as
countries with such surpluses become targets for discriminatory protectionist measures
by trading partners with external deficits.
My reasoning:
Excssesive CA surplus implies much are invested abroad, this is bad as there is less domestic investment, hard to tax, and domestic country becomes reliant on the other countries successes and become targets for discriminatory measures.
How is importers and exporters affected by an appreciation of the domestic home courrency?
The appreciation of the domestic currency (i) hurts exporters since their exports appear
more expensive to foreign customers in foreign currency, so exporters export less; and (ii)
helps importers since imports appear less expensive in domestic currency.
expansionary monetary policy include?
Any change in the asset markets, AA curve
The Convertibilty Law of 1991 in Argentina [define what it is and mention its economic effect
within 5 years of its taking effect]:
This law made Argentina’s currency fully convertible into U.S. dollars at a fixed rate of exactly one peso per dollar. It dropped inflation dramatically within 5 years.
eurocurrencies
Offshore currency deposits
the gold standard “rules of the game”:
The central bank practice of selling domestic assets in the face of deficit and buying domestic assets in the face of surplus.
Characteristics that help make a region an optimal currency area are..?
A high amount of internal trade - Trade
High degree of internal factor mobility. -Mobility
Highly correlated economic shocks among areas in the region. - Affects
A strong federal fiscal system for transferring funds to areas within the region that are affected adversely by shocks. - Transfers
Expected real interest rate: ? and =?
r(e) = R - P-hat(e)
Real interest parity (RIP) & Relative Purchasing power parity (PPP):
R – P-hat(e) = R* - P-hat*(e)
DS: =?
Domestic spending.
= C + I + G
Steralization
After buying assets CB sells domestic assets to ensure M does not change. (This increases the risk premium (=b-a) )
Bretton woods system (its basic charataristics)
Every country set their exchange rate to the US dollar and unvarying dollar price of gold 35$. Member countries held their official national reserves in form of gold or the US dollar. The US dollar was the primary reserve currency. It made the US the dominating economic country. Having a fixed exchange rates helped against volatile changes.
Eurobank
are banks that accept deposits denominated in euro currencies (including euro dollar)
Currency board
a currency board is in which the monetary base is back entirely by forging currency and the central bank therefore holds no domestic assets at all.
Exogenus
having an external cause or origin.
MEG
The monetary efficiency gain - for the
joining country is the joining country’s “savings from avoiding the uncertainty, confusion, and calculation and transaction costs that arise when exchange rates float”
ESL
The economic stability loss for the joining country
ESL is the loss to the joining country from:
(a) losing its ability to use monetary policy to stabilize output and unemployment and
(b) losing the automatic stabilizing properties that floating exchange rates provide.
DEI
the degree of economic integration between the joining country and the exchange rate area
LL
DEI and ESL
GG
MEG and DEI
Considerations for joining a optimum currency (or Fixed exchange rate) area
o MEG,ESL/DEI diagram
o Similarity of economic structure
o Fiscal federalism
o Endogeneity of monetary integration – increasingly similarities when integrating
There are five arguments against floating exchange rates
discipline from CB is gone
Destabilizing speculation and money market distrurbanceces
Injury to international trade and investment
Uncoordinated economic policies
the illusion of greater autonomy
balance of payments
CA + KA = FA
absolute purchasing power parity
P = EP*; “all countries’ price levels are equal when
measured in terms of the same currency”
