LDC Debt Crisis Flashcards
What is seignorage?
The difference in the cost of printing money and the value of the money. This becomes profit for the government.
What started the LDC Debt Crisis? (where did all of the money come from?)
In the mid-1970s, the oil prices increased dramatically, and OPEC countries did not want to see inflation, and so they deposited extra money in New York banks. This money was lent to developing countries at a very low real interest rate. The LDCs needed money to buy the oil.
In 1979, who was the chairman of the Fed and what did he want to accomplish with the economy?
Paul Volker wanted to “wring inflation out of the US economy”. He wanted to bring it down from around 20% to below 7%.
How did Volker go about accomplishing his goals, and what were the side effects? Why was this bad for the LDCs?
He contracted the money supply, increased the interest rates, and the dollar appreciated. The countries that borrowed the money could no longer afford to pay the money back, especially at the higher interest rates.
What was the first country to default, and when did they do so? What were the after effects?
In 1982, Mexico defaulted, and US banks panicked. Credit was cut off to other LDCs, and they were required to pay their loans back. But they could not afford to.
How did the US government deal with all of the countries defaulting?
The government forced Citicorp and Bank of America to forgive some loans.
What were the effects of debt reductions?
Countries were no longer able to borrow, and had to fund government expenditures by printing money, leaving them with inflation.
How was hyperinflation fixed in Bolivia?
The economy had become dollarized, and so the peso was pegged to the dollar, fixing the exchange rate, and the price level. People felt okay holding pesos, and demand for money went up, increasing the interest rate and causing a capital inflow.
