lecture 9 - challenges for the current IMS

Question 1

what was the old triffin dilemma concerned about?

Answer 1

the provision of liquidity in the IMS during the bretton woods period

Question 2

what was the triffin dilemma?

Answer 2

the demand for foreign exchange reserves exceeded the ampount of gold reserves by the early 1960s meaning that the US could face a run on the dollar as the US would be unable to convert all dollars into gold
if the US limited its provision of liquidity assets to the world, this would create a shortage of reserve assets especially in a context where the rest of the world economy grows

Question 3

what must the reserve currency do in order to provide the world with reserves denominated in its currency and satisfy world demands for liquidity?

Answer 3

the reserve currency must run current account deficits in order to provide the world with reserves denominated in its currency and satisfy world demands for liquidity

Question 4

what is the fiscal or safe assets version of triffin?

Answer 4

there is a dilemma between the objective of satisfying the global
demand for international liquidity, which requires a secular increase in
the ratio of US government debt to US GDP, and the objective of
maintaining US government debt safe, which requires stabilizing this
ratio.

Question 5

what has occured to reserve accumulation after the end of bretton woods?

Answer 5

there has been a dramatic rise in reserve accumulation since the end of bretton woods despite the shift in exchange rate arrangments

Question 6

what has occured since 1990 to different economies reserve to GDP ratios?

Answer 6

in advanced economy reserve to GDP ratio has held steady at 4% but emerging economies has risen to 20%

Question 7

what are the traditional factors which drive the accumulation of international reserves?

Answer 7

trade as a percentage of GDP to provide a buffer to finance international trade
short term external debt: to provide a buffer against suddent stops ie the east asian crisis

Question 8

what is the double drain?

Answer 8

crisis in emerging markets are not only due to a dried up of foreign financing (external drain, but currency crisis are often characterised by capital flight ie domestic residents taking their funds abroad leading to crisis in the banking sector

Question 9

what is the implications of reserve accumulation for the IMS?

Answer 9

a safe asset shortage means that the world economy is pushed below its potential. in order to restore equillibrium in asset markets, output/ aggregate demand needs to fall
they also argue that issuances of public debt are expansionary as they can eliminate the shortage
however this might put the IMS at risk

Question 10

what are the major implications according to Gopinath 2015 on th edominance of the dollar in currency invoicing ?

Answer 10

the impact of exchange rate fluctuations is asymmetric with implications for monetary policy
the impact of exchange rate fluctuations on trade is assymetric with consequences for international trade competitiveness

Question 11

what is the standard textbook arguement for the mundell fleming paradigm?

Answer 11

as the exchange rate depreciates, the relative price of imported goods will rise which increases the consumer price index but the trade balance will increase

Question 12

what does the mundell flemming paradigm hinge on?

Answer 12

it hinges on the assumption pf producer currency pricing ie pricing is in the currency of the exporter. however if most imports are invoived in the domestic currency, the sensitivity of inflation to exchange rate fluctuations is very low

Question 13

provide an example of the effect of a depreciation on a country in the international price system?

Answer 13

a depreciation of the lira of 10% implies an increase in imports prices in lira by 9.3% after one quarter but for the US a depreciation of the dollar of a similiar maginitude implies na increase in import prices of only 3.4%

Question 14

what does the exchange rate pass through?

Answer 14

it measures the sensitivity of a countrys import prices to fluctuations in the nominal exchange rate relatively to the trading partner

Question 15

what is the formula for the exchange rate pass through?

Answer 15

PT_(n,T) = θ_T + Ø*FCS_n +
ε_(n,T) where FCS is foreign currency share or the share of imports of country n not invoice in the currency of country n,

Question 16

what is the policy implication for inflation stabilisation and monetary policy spillovers?

Answer 16

the depreciation a countrys exchange rate following external shocks is not an inflationary concern for all countries
if a high proportion of imports is invoiced in foreign currency then pass through is high. if US raise interest rates this could have a considerable impact on inflation in other countries forcing an unwanted monetary policy response.
if imports are mainly invoiced in the domestic currency, the country is insulated from foreign monetary policy and other shocks, this is a privileged insularity for the US

Question 17

what is the policy implication of export competitiveness?

Answer 17

if exports are not priced in the domestic currency, an exchange rate depreciation does not increase competitiveness
for a country like the US, a depreciation would imply more competitiveness as goods are priced in the domestic currency. otherwise a depreciation only raises the mark up and profits of exporting firms

Question 18

what is the policy implication of internationalisation of currencies?

Answer 18

countries benefit from having their currency used for invoicing in terms of inflation stability.
if china internationalised their currency, they could insulate domestic inflation from foreign shocks. given inertia this process can take a long time

Question 19

what is the policy implication of special drawing rights

Answer 19

if firms priced their goods in special drawing rights, there would more symmetry in the impact of exchange rate shocks on inflation
The IMFs unit of acocunt is a basket of the major currencies. private entities and invidividuals cannot hold special drawing rights at the moment