Lecture 6 Flashcards
What are the types of currency crises?
Hyperinflation, balance of payments crisis, asset price deflation, banking crisis, external debt crisis, and domestic debt crisis.
A balance of payments crisis
when the currency depreciates due to investors fleeing
An asset price deflation
a sudden decrease in the value of financial assets.
A banking crisis
liquidity problems
all hit by the same outside shock or because failure in one bank spreads to other banks in the system.
What are the advantages of a monetary union?
Elimination of exchange rate fluctuations, reduced transaction costs, decreased risk factor for international business, and difficulty in implementing nationalist trade policies.
What are the disadvantages of a monetary union?
Loss of freedom of monetary policy and the ability to manipulate interest rates, limited control over fiscal and monetary policy, and dependence on the central bank of the union.
External debt crisis
External debt refers to the money that a country borrows from foreign lenders or owes to foreign entities.
Domestic debt crisis
Domestic debt refers to the money a country borrows from its own residents or entities within its borders.
How do the current account and the capital account tend to move?
When a country has a current account surplus (exports exceed imports), the capital account tends to have a deficit (outflows exceed inflows). This also works the other way around. This relationship is known as the “twin deficits” or “twin surpluses” phenomenon.
What are the contributing factors to contagion in currency crises?
Sudden reversals of capital inflows, surprise announcements to financial markets, and highly leveraged financial institutions.
How did the European Monetary Union (EMU) come about?
It started as a Preferential Trade Agreement (PTA) area to reduce trade barriers and compete with US dominance in trade.
What are fiscal policy and monetary policy?
Fiscal policy is when governments tax and spend,
monetary policy involves manipulating interest rates and controlling the money supply.
What happens when a country joins a monetary union?
They lose the ability to control monetary policy, including interest rates and inflation rates.
What factors contributed to the Euro crisis?
high sovereign debt, financial instability, housing bubbles, and mismanagement in several European countries.
What was the main concern during the Euro crisis?
The main concern was the possible breakup of the Eurozone, which would have caused severe financial chaos and loss of confidence in the global economy.
