International Monetary Relations Lecture Source Sean Erhlich Professor of Intro to International Relations Florida Book Source World Politics Interests Interactions Institutions Second Edition State University What is Monetary Policy between countries demand Domestic Monetary Policy down money is interest rates o International policies that govern one exchange over another trade currency o The value of currencies between countries o Exchange Rate The price of one currency over another set by supply and o Inflation If prices of other goods are going up the value of the dollar is going o Interest Rates The main tool at the disposal of governments to influence The amount that you have to pay in order to borrow money o The domestic business cycle and monetary cycle The market economy fluctuates and there is no way to break the cycle However you can influence it When the economy is going strong it is good to raise or encourage interest rates to decrease spending o The exchange rate Determined by supply and demand If the US is undergoing a depression or recession while Europe maintains its normal policy then overtime they the US will become worthless in value in comparison to the Euro and vice versa during inflation Over the past 10 years the pound has appreciated in value which means you can get more for your money o Appreciate Gains value o Depreciate Loses value o Strong vs weak currency International investors want strong currency If an American student studies abroad they will most certainly want their dollar to have most weight o Fixed pegged exchanged rate Commodity peg Gold Standard Peg to another currency peg o Dollarization When you choose a country s currency as your own legal tender Example Ecuador who uses the US dollars o Managed float You allow the currency to float but eventually allow it back in o What Affects Currency Value Interest Rates Lower rates with decrease demand for money Higher rates with increases demand for money When the economy is getting weaker the government can lower interest rates which can keep us out of recession but lower interest rates can also lead to inflation The Politics of Exchange Rates o Fixed vs floating Floating benefits those not involved in international trade Exporting and international investors benefit from fixed stability Import Competitors benefit from floating volatility for foreign competition Those not engaged in international economic exchange benefit from floating rates ability to use money policy for domestic purposes o Strong vs weak currency Distributes money to some and redistributes away from others Beneficiaries of weak currency are similar to beneficiaries of free trade Weak currencies benefit exporters and import competitors and attract more investment Strong currencies benefit consumers International Monetary Regimes o Variety of international systems Gold standard Wizard of Oz is direct parable Britain linked their currency to gold first and then insisted that everyone else follow their lead If every country chooses to use gold then you have this standard as an exchange rate 18th 19th cent o The Classical Gold Standard A country s government went on gold by promising to exchange its currency for gold at an established rate in the US it was one troy ounce of gold for 20 67 This move made the country s equal to gold and interchangeable at a fixed rate with the money of any other gold standard country Took place from the 1870s through to 1914 o The Interwar Gold Standard o The Bretton Woods System Was based on a fixed rate and a gold standard for the US and on a fixed but adjustable rate for other currencies that were on a dollar standard This permitted governments to adjust currency values when they felt it desirable to do so 1945 1973 Other countries can revalue or devalue as necessary but should try to manage short term cases IMF funded mostly b US provides short term assistance to help maintain pegs o Why the variation in International monetary systems Currency stability as a public good Hegemonic stability theory Britain in 19th cent American in 20th cent The economic integration exists the more value on stability exists
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