IMF Chapter 15

Question 1

What are the Characteristics of SIMICS?

Answer 1

1. Financial markets: Government has control over banks and forces low interest rate to simulate investment, causing excess demand for money, people invest abroad and generating external debt
2. Forex MarketL Restrictions, pegged exchange rates, capital outflows and exchange controls
3. Output and exports not much diversified
4. High inflation: seigniorage = government budget deficitst financed by printing money
5. Corruption

Question 2

What were the internal causes of the Latin American debt crisis?

Answer 2

Government failures: 1. Control over banks and forcing of low interest rates
2. Excessive investment and moral hazard
3. money creation to finance government expenditure
4. Restrictions and exchange controls
5. Acceptance of floating interest rates on debt

Question 3

What were the external cause of the Latin American debt crisis?

Answer 3

1. First oil shock (1973-1974)
2. Second oil shock (1979)
3. US policy

Question 4

What is petrodollar recycling?

Answer 4

The international spending or investment of a country’s revenues from petroleum exports

Question 5

What were the goal and three phases of the management of the debt crisis?

Answer 5

Goal was to avoid defaults:
1. Crisis is a temporary liquidity problem: reschedule payments
2. Try to grow out of debt problem, so simulate economic growth to reduce debt/GDP ratio
3. Crisis is viewed as a solvency problem: Forgive debt (Brady plan)

Question 6

What were the lessons and links to the crisis?

Answer 6

1. LDC government should reduce economic control
2. Be cautious with borrowing under risk
3. Banks must be careful with lending
4. Umbrella organizations are useful IMF etc
5. Liquidity provisions to buy time
6. Debt forgiveness/bailout

Question 7

How did the First oil shock affect LDC and OPEC countries?

Question 8

How did the second oil shock affect LDC countries

Question 9

How did the US policy affect the LDC countries