Midterm Flashcards
What is the gold standard?
- currency could be converted to a weight of gold
- Fixed exchange rates
- Expansionary monetary policy limited to government supply of gold
What is Bretton woods and IMF?
- Fixed exchange rate system by IMF
- $ pegged to gold, all other currencies had fixed exchange rates against dollar
- Dollar main international reserve currency
- Foreign banks buy/sell $
- US has monetary independence
- BoP imbalances offset by buffer of international reserve and IMF credits
What is IMF
- Helps countries defend their currencies against cyclical, seasonal or random occurrences
- Assist countries having structural trade problems if they promise to take adequate steps to correct these
- Special drawing rights is the IMF reserve assets. Weighted average of five currencies including the Chinese Renminbi
Why did they stop fixed exchange rates after IMF?
- BOP deficit in US due to $US being main reserve currency
- foreigners lacked confidence in US to meet commitment to convert to gold
- After $ was devalued and currencies were allowed to float
What are the four IMF classifications of currency regimes?
Category 1: Hard Pegs (13.0%)
– Countries that have given up their own sovereignty over monetary policy
– E.g., dollarization or currency boards
*Category 2: Soft Pegs (39.6%)
– AKA fixed exchange rates, with five subcategories of classification
*Category 3: Floating Arrangements (37%)
– Mostly market-driven, these may be free floating or floating with occasional government intervention
Category 4: Residual (10.4%)
– The remains of currency arrangements that don’t well fit the previous categorizations
What are the three “prices” of money?
– Price relative to time → interest rate
– Price relative to foreign → currency exchange rate
– Price relative to all goods and services → aggregate
price level (price deflator)
What is monetary policy?
A
The central bank’s way of controlling the moeny supply and credit.
Tools: Discount rate, reserve requirement, open market operations.
Objective: stimulate GDP, lower unemployment and inflation, target a level of exchgange rate.
What are open market operations
OMOs, they are tools for changing short-term interest rates.
They affect the monetary base which is the portion of commercial banks’ reserves that are maintained in accounts with teh central bank plus the total currency in circulation.
What are the attributes of idea currency?
The impossible trinity: 1) Exchange rate stability; 2) Full financial integration; 3) Monetary independence
Forces of economics do not allow all three to be achieved simultaneously (look at graph slide 29)
What is triffin dilemma
Conflict in objectives between domestic monetary and currency policy objectives and external or international objectives when a country’s currency is used as a reserve
What does BOP include
Current account (CA), Financial/capital account (FA) and Official reserve account (ORA)
Why is it incorrect to state BOP is in disequilibrium?
Because BOP must balance. The “net errors and omissions account” is created to preserve the balance
What is the current account in BOP?
All international transactions with income or payment flows occur within a year. Includes four subcategories:
1. Goods trade and import of goods
2. Service trade
3. Income
4. current transfers
- Dominated by goods trade and import (AKA Balance of trade)
What is the financial account in BOP?
Exchange of financial assets, the degree of control over assets/operations is used to classify financial assets.
Net foreign investment (FDI): Direct investment, acquired with the goal of controlling the company (10% threshold)(honda builds plant in ohio)
Portfolio investment (FPI): german resident buys japanese government bonds
How does Supply = Demand also show that BOP is zero?
Supply = demand
exports + foreign investments = Imports + Investments in the US
Current account = - (Financial account)
