UT GOV 312L - How Do Bond Markets Domestic Economic Policy? (5 pages)

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How Do Bond Markets Domestic Economic Policy?



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How Do Bond Markets Domestic Economic Policy?

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Lecture number:
21
Pages:
5
Type:
Lecture Note
School:
University of Texas at Austin
Course:
Gov 312l - Issues and Policies in American Government
Edition:
1

Unformatted text preview:

GOV 312L 1st Edition Lecture 21 Outline of Current Lecture I How do bond markets domestic economic policy II The US the IMF and the Bretton Woods system III American at the center of the 2008 financial crisis IV Introduction Development foreign aid and ethics V What are the obstacles to development VI How best can wealthy countries help poorer countries Does foreign aid work VII Practical ethics and development Current Lecture The Discipline of global capital bond Markets Bond market can control a country s debt o They can sell bonds in secondary markets if they don t like the way the country is handling its economy Current era of capital mobility costs of moving financial assets from one country to another extremely low or nonexistent o Competitive pressures unleashed by US in mid 1970 s o effective elimination of the costs of the selling and buying bonds brokering is not a job anymore o If bond markets lose confidence they can punish that country by selling bonds Reduces the borrowing ability of the country This raises import taxes o If taxes on capital too high it invests in another economy Empowers the Electronic Herd When foreign capital holders lose confidence in a government s monetary policy they tend to sell assets denominated in that currency o Currency depreciates o Government can reassure investors or bring them back by offering higher returns i e push interest rates up o But raising interest rates steeply pushes domestic economy into recession Example Greece Spain Ireland Portugal Cyprus Italy in the Euro crisis These notes represent a detailed interpretation of the professor s lecture GradeBuddy is best used as a supplement to your own notes not as a substitute Real policy implications international capital markets can sharply constrain country s monetary policy limiting discretion of elected officials and forcing them to push it into recession to reassure creditors Bretton Woods Economic Order Emerges in final stages of World War II 1944 US supports



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