W4: Cooperation on International Monetary and Financial Affairs: IMF en EMU Flashcards
Lecyure & Book §7
WHAT ARE IMF AND EMU ABOUT?
IMF functions
4 -
- stability of the international monetary system
- keeping track of the global economy and the economies of member countries
- lending to countries with balance of payments difficulties
- giving practical help to members
WHAT ARE IMF AND EMU ABOUT?
EMU of the EU
- coordination of economic and fiscal policies
- common monetary policy
- common currency, the euro
- some countries adopterd the euro –> Eurozone/euro area
MONETARY POLICY
monetary policy is about determining money supply
- usually done by central bank
- controlling inflation vs. promoting economic growth
MONETARY POLICY
monetary policy has an impact on exchange rates; how?
- central banks buy and sell own and foreign currencies
- this influences prices on foreign exchange markets, i.e. exchange rates
MONETARY POLICY
why cooperate?
- stabilise exchange rates to reduce transaction costs for trade and investment
- create lending mechanism for countries with foreign exchang shortage in a balance of payments crisis
FORMS OF INTERNATIONAL MONETARY COOPERATION
stabilised flexible exchange rates through …
consultation, policy coordination, monitoring
FORMS OF INTERNATIONAL MONETARY COOPERATION
fixed exchange rates
3 -
- central bank guarantees specific exchange rates
- may allow degree of flexibility/adjustability
- reduces transaction costs but ties down monetary policy
FORMS OF INTERNATIONAL MONETARY COOPERATION
Monetary union
2 -
- irrevocability fixed exchange rates, no adjustments possible
- leads to single currency
FORMS OF INTERNATIONAL MONETARY COOPERATION
arrangements that can provide support in case of crises
- simple agreements to porvide mutual assistance
- or institution that serves as ‘lender of last resort’
incentives to free-ride
“beggar thy neighbor”
weaker currency makes exports more competitive: push down exchange rate, competitive devaluations
incentives to free-ride
moral hazard
crisis lending mechanism leads to moral hazard: insurance against bad outcomes encourages risky behavior and therefor promotes those bad outcomes
incentives to free-ride
the need for some institution or IO, bc…
- create perspective of continuing cooperation, enhance predictability, build trust
- create shared rules, monitoring, information, possibly enforcement
- ensure collective gain against individual incentives to defect
IMF
origins
4 -
- pre-WW1: gold standard
- 1930s: great depression, competitive
- Bretton Woods Conference 1944: gold exchange standard –> US dollar linked to gold, all other currencies to US dollar, fixed ‘par value’, but adjustable
- Role of IMF: monitor exchange rates and members’ macroeconomic policies, provide leans to countries with BoP difficulties - “lender of last resort” (Breakdown and “Non-System)
IMF
since 1960s
gold exchange rate standard under strain
IMF
1971
Nixon suspends dollar convertibility into gold
IMF
1976: Jamaica agreement
members are free to choose their preferred arrangement, but ‘promote stable system of exchange rates
IMF
new role for IMF
monitoring and advice on macroeconomic policies, lender of last resort, coordination of debt restructuring -> development under the Non-System
IMF
tendency of growing lean volume
increased use of conditionality,
including in terms of fundamental economic reforms,
concessional loans for low-income countries,
and also specific credit facilities for (more) developed countries,
with limitied or no conditionality
IMF
different type of intergovernmental IO
- built-in equality
- governments decide - but voting based on quotes; 85% majority for amandments of Articles of Agreement and quota review, US veto, EU members ca. 33%, generally culture of consensus
- dissatisfaction amongst the underrepresented: also because of the power to shape what policies are considered ‘sound’
- 2010 reforms: total quotas doubled, increased weight for developing countries and emerging ecoonomic, ratification by US congress only in 2015
EU’S ECONOMIC AND MONETARY UNION EMU
werner report 1970
- unification of monetary and economic policy
- monetary union: convertibility ad irrevocably fixed exchange rates, total capital mobiloity, and possibly a single currency, community system for the central banks
- economic union: ‘harmonisation and finally unification of economic policies”, center of decision for economic policy, politically responsible to EP
- three-stage process to reach EMU by 1980
- attempts to stabilise exchange rates fail (European Monetary System)
EU’S ECONOMIC AND MONETARY UNION EMU
created in 1979 with 3 basic elements
- exchange rate mechanism (fixed but adjustable)
- credit facilities for defense of parities
- European Currency Unit
EU’S ECONOMIC AND MONETARY UNION EMU
succes, and forms basic for efforts at relaunching EMU
- treaty of maastricht: EU objective
‘to promote economic and social progress
which is balanced and sustainable,
in particular through the creation of an area without inernal frontiers,
through the strengthening of economic and social cohesion
and through the establishment of economic and monetary unoin,
ultimately including a single currency
EU’S ECONOMIC AND MONETARY UNION EMU
road to EMU: three stages
- 90-93: total K mobility, closer coordination and cooperation
- 94- 98: convergence of economic and moentary policies, criteria: inflation, gov. deficit, gov. debt, exchange rate stability, interest rates
- 1999: irrevocably fixed exchange rates, introduction of euro, introduction of euro notes and coins since 2002
