International Monetary Relations begin with the national context what is the price of money o interest rates who sets interests rates o national gov national government o determine the currency o print bills and mint coins control the money supply o o US interest low after 2008 crash a national monetary system is a classic example of public good o everyone benefits and no one can be excluded o goals liquidity stability confidence what are exchange rates Why do they matter o o to exchange with others in a foreign country we need to convert our currency into theirs to do so we need agreements on rules institutions and prices by which one currency can be traded for another o exchange rate the price at which one country is exchanged for another o appreciation a currency increases in value in terms of other currencies o depreciation a currency decreases in value in terms of other currencies o o can t know anything about relative loss from exchange rates who s going to lose when US exchange rates decrease widget price decreases answer the European widget companies competitors exchange rates who gains who loses o a depreciation in the exchange rate 1 benefits exporters as the price of their products is now lower 2 benefits import competing industries as the price of foreign products is now higher ex BMW more exp go buy Cadillac s 3 harms consumers who pay higher prices for imported products and domestic substitutes o inverse for an appreciation in the exchange rate consumers prefer higher rates can buy more from abroad while exporters prefer lower rates can sell from abroad o 1 6 euro USD means 1 6 dollars for a euro dollar appreciated over time how are currency values determined supply and demands o o relative interests rates play the most important role if interests rates are higher in the US investing in the US is more attractive to invest in the US you need dollars higher interest rates increase demand for the US US appreciates lower interest rates decreased demand for US US depreciates o government manipulates interest rates US monetary policy to affect macroeconomic conditions unemployment inflation and economic growth if president was control of monetary funds and elections come up the president would want to lower the interest rates then reelection and everyone happy governments must decide fix or float l l l permanently fixed fixed but adjustable rates limited float freely floating o a continuum o o rates o fixed exchange rate government promises to keep value of currency constant in terms of another currency of precious metal gold severely limits autonomy of government handcuffing government o floating exchange rates value of currency is determined by market factors o mixed systems requires government intervention currency can float but only within certain limitations currency is fixed to something but can be adjusted o p358 map of world shows fixed rate exchange rates Bretton woods falls into system of fixed but adjustable exchange rates who benefits from these changes fixed exchange rates provide stability and predictability o o o o benefits those engaged in trade it lowers transaction costs however it reduces a government s ability to have an independent monetary policy floating exchange rates gives governments more freedom but they increase the cost of international trade and investment those with international economic concerns favor a fixed system those with domestic concerns favor a floating system Hans Rasling The Best Stats you ve ever seen ted talk 2006 gapminder org International monetary regimes o two principal features clarify whether currency values are expected to be fixed or floating or mixed establish a common base or benchmark to which currencies can be compared o three kinds of benchmarks commodity standard classic gold standard commodity blacked pepper standard bretton woods dollar ties to gold everyone ties to dollar national paper currency standard currency system The Gold Standard o currencies backed by gold with exchange rates that did not change in a sense a common currency for the entire world o o pro a currency stability helped facilitate growth in international trade and investment con constrains domestic policy autonomy o o necessary condition consensus among the leading financial powers o after WWI there were attempts to restore the gold standard but the pre war consensus had been replaced by mistrust which famous book is actually thinly veiled critique of the gold standard Interward period 1918 1945 two choices for international monetary cooperation 1 cooperate prewar gold standard 2 defect interwar period o beggar thy neighbor politics of competitive devaluation o who gains from depreciated x rates exporters and import competing industries o exports increase imports decrease balance of trade improves o but what does your competitor do devalue too competitive devaluations o these policies of defection worsened the Great Depression The Bretton Woods System 1945 1971 o US fixed to gold rate of 35 ounce o all other currencies fixed to the US dollar o US is key reserve currency o US was the hegemonic power willing to provide the public goods of stable international monetary system o August 1971 Nixon announces that the US will no longer exchange dollars for gold Japan and Germany rapidly growing changing international economic balance of power o major currencies begin to float against each other o why end of Bretton woods system US now less willing to pay the costs of leadership others less willing to accept US dominance they wanted a voice in the running system fixed exchange rates make it more difficult for the government to use monetary policy domestically because it basically ties hands Todays international monetary system 1973 floating rates among the major currencies more national monetary autonomy to each government but still must cooperate in times of crisis o o o o o OPEC oil embargo 1973 multiple currencies institutions have places US dominance IMF has become more important main forum for multilateral leadership G7 G20 o choices for the rest of the world Development central puzzle why are some nationals rich and some poor where should we look for the answer o 1 within the answers to development are within your own country o 2 outside the nation international factors poor countries cannot develop within the current international system dominated by the rich ex 1 Zambia and South Korea roughly the same level of development in 1964 o o o Z a
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