Lecture on Fiscal and Monetary Institutions in the Eurzone (Pt 1)

Question 1

During the 19th century, people started to identify money and country and efforts were developed to put order; what did this lead to?

Answer 1

Gold standard

Question 2

What does Hume’s price-specie mechanism say about the internal working of a monetary union?

Answer 2

1. A country whose prices are too high is uncompetitive and runs a trade deficit
2. Importers spend more gold money than importers receive from abroad
3. Stock of money declines
4. Long-run monetary neutrality

Prices will decline, until competitiveness is restored

Question 3

The continuing automaticity of the gold exchange standard relied on adherences to three principles, known as the “rules of the game”, what are they?

Answer 3

1. Full gold convertibility at fixed price of banknotes
2. Full backing where central bank holds at least as much gold as it has issued banknotes
3. Freedom in trade and capital movements

Question 4

Among the many lessons learnt, which two are relevant for the monetary integration proecss?

Answer 4

1. Freely floating exchange rates result in misalignments that breed trade barriers and eventually undermine prosperity
2. Management of exchange rate parities cannot be left to each countries discretion, there is need of a system.

Question 5

What did the Bretton Woods conference establish?

Answer 5

An international monetary system based on paper currencies

Question 6

What were the main elements of the Bretton Woods conference?

Answer 6

• Gold as the ultimate source of value, but dollar as the anchor of the system
• All other currencies defined in terms of the dollar
• IMF supervising compliance and providing emergency assistance
• Most countries made abundant use of capital controls

Question 7

When did the USA “suspend” the dollar’s convertibility into gold?

Answer 7

1971

Question 8

What was the first response of Europe to the collapse of Bretton Woods?

Answer 8

“European Snake” - regional version of the Bretton Woods system to limit intra-European exchange rate fluctuations

Question 9

In spit of the failure of the “european snake”, what two innovations did it bring about?

Answer 9

1. Determination to keep intra-European rates fixed, irrespective of what happened elsewhere in the world
2. European currencies needed to be defined vis-a-vis each other. The snake was meant to be “an island of stability in an ocean of instability”

Question 10

What is the heart of the European Monetary system?

Answer 10

The ERM - Exchange Rate Mechanism

Question 11

What four main elements did the ERM (Exchange Rate Mechanism) involve?

Answer 11

1. A gird of agreed upon bilateral exchange rates
2. Mutual support
3. Possibility of realignments but subject to unanimity agreement
4. The European Currency Unit (ECU)

Question 12

What country became the standard to emulate inflation rates?

Answer 12

Germany

Question 13

What did the ERM agree on post-crisis (1993)?

Answer 13

A floating exchange rate regime (i.e. Bilateral parities could move by 30%)

Question 14

After the Maastricht Treaty, ERM II was formed, what are the main elements?

Answer 14

• Parities defined vis-a-vis the euro
• Margin of fluctuation less precisely defined
• Interventions automatic and unlimited, but ECB may stop them
• Currently, only member in ERM II is Denmark, which has a non-official +- 1 per cent band.

Question 15

When was the exchange rate of 11 countries “irrevocably” fixed and the power to conduct monetary policy was transferred to the European System of Central Banks under the aegis of the European Central Bank?

Answer 15

4 January 1999

Question 16

When were Euro banknotes and coins introduced?

Answer 16

January 2002