Reading...
Play button
Play button
Use LEFT and RIGHT arrow keys to navigate between flashcards;
Use UP and DOWN arrow keys to flip the card;
H to show hint;
A reads text to speech;
48 Cards in this Set
- Front
- Back
|
Macroeconomic Policy Trilemma:
What are the three desirable policy choices? |
1. fixed exchange rates
2. free movement of capital 3. independent monetary policy |
|
|
What is the macroeconomic policy trilemma?
|
Only two of the three desirable policy choices can be attained simultaneously.
|
|
|
Who is Robert Mundell?
|
1999 Nobel Prize winner for International Economics, described "The Impossible Trinity" of policy trilemma
|
|
|
Free Movement of Capital: In order to free up its financial markets and join world financial & monetary system, a country needs to:
|
1. Open up currency transactions
2. Open up capital movements 3. Open up movement of goods |
|
|
If US interest Rate > German interest rate then...
EX of Uncovered interest Parity |
Dollar expected to depreciate
|
|
|
If German interest rate > US interest rate then...
EX of UIRP |
Euro expected to depreciate
|
|
|
Do Central Banks set interest rates?
|
No
|
|
|
How do central banks affect interest rates and exchange rates?
|
Buy & Sell government securities
|
|
|
What is domestic credit?
|
value of domestic securities held by a central bank
|
|
|
What are the central bank's assets?
|
domestic credit & foreign reserves
|
|
|
Free Movement of Capital: Free to invest in ____ and ____ assets.
|
Free to invest in DOMESTIC and FOREIGN assets.
|
|
|
Free Movement of Capital: Hold both ______ and ______ Treasury bills.
|
Hold both US and GERMAN Treasury Bills.
|
|
|
Free Movement of Capital: Expected returns must be ______.
|
Expected returns must be EQUALIZED.
|
|
|
Free Movement of Capital: Uncovered Interest Rate Parity
|
Relates exchange rates and interest rates..equal interest rate, equal return... depreciation of a dollar would have to be matched by interest rate change in a country to equalize returns
|
|
|
Free Movement of Capital:
Interest rate differential equals___________________ |
Interest rate differential equals expected rate of depreciation
|
|
|
Free Movement of Capital: Fixed _______ rates
|
Fixed Exchanged rates
|
|
|
Free Movement of Capital: No expectations of _________________
|
No expectations of depreciation
|
|
|
Free Movement of Capital:__________ rates equal between countries.
|
INTEREST rates equal between countries.
|
|
|
What is an example of a capital control?
Is it used today? |
Restrictions on the amount of foreign currency that domestic residents can purchase.
YES, by small countries |
|
|
Capital Controls permit the ________ rate to be different from the world rate with fixed exchange rates.
|
DOMESTIC
|
|
|
What is the disadvantage of capital controls?
|
Reduce the efficiency of international capital markets
|
|
|
How are exchange rates fixed?
|
Capital & Exchange Controls:
1.fixed by fiat 2.countries announce exchange rate 3.not necessarily rates that people conduct trade 4.parallel or "black" markets |
|
|
Fixed Exchange Rates: How are exchange rates fixed?
|
Free movement of capital, expected depreciation must be zero, domestic interest rate must equal world rate
|
|
|
What policy is necessary to fix exchange rates?
|
Monetary policy
|
|
|
Foreign securities are denominated in ___________ currency. Frequently, take form of ______ issued by foreign govts.
|
FOREIGN, BONDS
|
|
|
Foreign Securities are..
|
FOREIGN RESERVES
|
|
|
What are the liabilities of the Central bank?
|
currency in circulation, bank reserves held by commercial banks (mostly required by the Fed)
|
|
|
What are Open market operations?
|
central bank purchases domestic credit with currency
|
|
|
What is Foreign Exchange Intervention?
|
central bank purchases foreign reserves with currency
|
|
|
open market operations and foreign exchange intervention affect the ___________ and __________
|
MONEY SUPPLY & Interest Rates
|
|
|
Open market operations and foreign exchange intervention increase the money supply to...
|
decrease interest rates
|
|
|
Open market operations and foreign exchange intervention decrease the money supply to...
|
increase interest rates
|
|
|
Monetary Policy: How to fix exchange rates with free movement of capital?
|
1. Central bank directs monetary policy towards keeping the domestic interest rate equal to the world interest rate.
2. keep expected depreciation zero 3. cannot direct monetary policy towards other objectives |
|
|
Cannot have independent monetary policy when...
|
fixed exchange rates and free movement of capital
|
|
|
With fixed exchange rates & free movement of capital, independent monetary policy is not possible because...
|
monetary policy is directed towards fixing the domestic interest rate at the world interest rate & not towards other objectives such as inflation or unemployment
|
|
|
Cannot have free movement of capital when...
|
there are fixed exchange rates and independent monetary policy
|
|
|
No free movement of capital w/ fixed exchange rates & independent monetary policy bc
|
monetary policy does not necessarily set domestic interest rate equal to world interest rate, can't allow exchange rate to be market determined
|
|
|
Cannot have fixed exchange rates when...
|
independent monetary policy and free movement of capital
|
|
|
Independent monetary policy & free movement of capital allows no fixed exchange rates bc
|
country must allow its exchange rate to be market determined - free to move
|
|
|
What is the United States policy choice?
|
independent monetary policy, free capital mobility, flexible exchange rate
|
|
|
What countries have a macroeconomic policy similar to US
|
Australia, canada, United Kingdom
|
|
|
What 12 countries joined by combining their national currencies to form the Euro in January 1999 and 2001?
|
Austria, belgium, france, finland, germany, ireland, italy, luxembourg, netherlands, portugal, spain...Greece
|
|
|
What are these countries known as?
|
Eurozone, Jan2002 elimnated indivdual currencies in favor of EURO notes & coins, European Central Bank conducts monetary policy for the EUROZONE
|
|
|
What is the internal policy of the Eurozone?
|
free movement of capital, fixed exchange rates, no monetary policy (Same as US)
|
|
|
What is the external policy of the Eurozone?
|
independent monetary policy, free movement of capital, flexible exchange rates, same as US
|
|
|
What is China's macroeconomic policy?
|
Fixed exchange rates, independent monetary policy, but controls on capital
|
|
|
China has pressure to allow more _______ __________ flexibility
|
exchange rate, by US to let YUAN appreciate, not much response so far (2%)
|
|
|
China is fueled by a trade _____
|
deficit
|
