International Economics - 2Nd Half

Front 1

Appreciation

Back 1

an increase in the value of a currency compared to another currency

"the dollar appreciated against the euro"

Front 2

Depreciation

Back 2

a decrease in the value of a currency compared to another currency

"the dollar depreciated against the euro"

Front 3

Revaluation

Back 3

the revising of the value of a nations currency by the central bank

Front 4

Devaluation

Back 4

to lower the exchange value of (a currency)

Front 5

Spot Market

Back 5

what the rate was at a particular point in time, meaning the transaction takes place today at today's rate

Front 6

xx-day forward rates.market

Back 6

agreement to buy or sell currency at an agreed upon rate, payable at some future date

Front 7

Trade-weighted exchange rate

Back 7

the average appreciation of depreciation of a currency against its major trading partners

Front 8

arbitrage

Back 8

basic arbitrage is buying low and selling high in the currency market

2-point arbitrage, 3-point arbitrage

Front 9

hedging

Back 9

to guard against risk

done by importers and exporters to lock in a rate for a particular currency that will be used to way for good in the future

example - locking in the 3-month forward rate for wine that will be purchased in the future months

Front 10

Covered Interest Arbitrage

Back 10

Speculators (Americans) consider interest rate as the main factor to determine of buying at a spot rate or the forward rate, when both rates are identical. If the U.S. has a higher interest rate, buy at the forward rate in order to leave the money in the US for a higher interest), of the interest rate of the seller's country is higher, then buy at the spot rate and leave the money at seller's country.

Front 11

Speculation

Back 11

bet against trends in the currency market (forward rate), they have a profit motivation

Front 12

Mexican Peso Crisis

Back 12

Also called the "1994 Economic Crisis in Mexico"

-crisis coincided with the 6-year election cycle
-there was a policy of infrastructure development before the election
-There was alot of short term borrowing and selling of Mexican bonds to the US which allowed Mexico to engage in deficit spending
-Mexico already had an overvalued exchange rate and a quasi-pegged currency
-To correct the problem the finance minister "Jaime Serra Puche decided to revalue the currency, unfortunately he told too many people of his plan
-people began taking their money out of pesos and the currency collapsed
-Mexico was bailouted out by when President Clinton issued an executive order which gave Mexico an $50 billion; he was concerned about the effect of the the crisis would have on American exports
-Mexico paid back on schedule and with interest

Front 13

Tequilla Effect

Back 13

The impact of Mexican Crisis on Brazil and Argentina

Front 14

Asian Financial Crisis of 1997

Back 14

-The countries affected the most were South Korea, Indonesia, the Philippians, and Thailand
-all four countries currencies were pegged to the US $
-crisis caused by: massive capital inflow which led to an asset (real estate and stocks) bubble, lack of banking regulations, bankers lending to their friends regardless of their credit worthiness, short term borrowing in foreign currencies
-The first currency to collapse was the Thai baht when the government decide to float the currency and remove the peg

Front 15

Russian Rouble Crisis of 1998

Back 15

-triggered by the Asian Financial crisis and the overall decline in world commodity prices; the Russian ruble is a commodity-linked currency
-the ruble was overvalued and oil prices were falling
(PLEASE ADD MORE)

Front 16

Brazilian Real Crisis of 1998-9

Back 16

caused by:
1) Brazil's huge debt burden - 1/2 in dollars, 1/2 short term
2) Brazil's currency was appreciating over time compared to the rest of the world; it was on a crawling band with the US $
Result:
1) Brazil received a $40 BN bailout from the IMF (technically a bailout of private banks)
2) currency collapsed and exports are cheaper; results in export-led recovery

(PLEASE ADD MORE)

Front 17

Argentina Crisis of 2001 

Back 17

cause: 1) currency board pegged the argentine peso to the dollar 2) recessions after both the Mexican crisis and the Brazilian crisis 3) currency board governor increased bank reserve requirements 4) Foreign banks refused to cooperate and they took their dollars out of the country
5) As a result, the CB governor began printing more money than there were dollars to back it up.
6) Some cities began printing their own currency
7) Bank ran out of money and people began rioting because they couldn't get their money.
8) Ultimately, 7% of population feel into INDIGENCE (homeless and can barely find food)

Front 18

How central bank intervention  works

Back 18

country will buy up their domestic currency using their foreign exchange reserves of key currencies; prevent currency from collapsing and protects the value of the currency

Front 19

International monetary policy  coordination (AKA Coordinated Central Bank Intervention)

Back 19

This phrase was used in reference to the G7 working together to weaken Japan's currency (after the natural disasters of 2011)
Reasons: 1) a rising yen makes exports more expensive, 2) a mark of sympathy

Front 20

The Greek Crisis of 2010

Back 20

"On 2 May 2010, the eurozone countries and the International Monetary Fund agreed to a €110 billion loan for Greece, conditional on the implementation of harsh Greek austerity measures. In May 2010, the Greek government deficit was estimated to be 13.6% which is one of the highest in the world relative to GDP. Greek government debt was estimated at €216 billion in January 2010. Accumulated government debt is forecast, according to some estimates, to hit 120% of GDP in 2010. The Greek government bond market is reliant on foreign investors, with some estimates suggesting that up to 70% of Greek government bonds are held externally. On 27 April 2010, the Greek debt rating was decreased to the first levels of 'junk' status by Standard & Poor's amidst fears of default by the Greek government. Yields on Greek government two-year bonds rose to 15.3% following the downgrading.

http://en.wikipedia.org/wiki/2010_European_sovereign_debt_crisis"

Front 21

The Ireland Crisis

Back 21

The Irish government officially announced it was in recession in September 2008, it was also the first state in the Euronzone to enter recession. The Irish economy expanded rapidly between 1997 to 2007 due to a low corporate tax rate, low ECB interest rate, and it led to an expansion of credit and included a property bubble which petered out 2007. €85 billion rescue package for Ireland in November from EFSF ( European Union's European Financial Stability Facility), and IMF.

Front 22

The Role of the International Monetary Fund (IMF)

Back 22

The International Monetary Fund (IMF) is the intergovernmental organization that oversees the global financial system by following the macroeconomic policies of its member countries, in particular those with an impact on exchange rate and the balance of payments. Its objectives are to stabilize international exchange rates and facilitate development through the encouragement of liberalising economic policies in other countries as a condition of loans, debt relief, and aid. It also offers loans with varying levels of conditionality, mainly to poorer countries

Front 23

The Portugal Crisis

Back 23

The Financial Crisis of 2008 is still affecting the Portuguese economy severely, causing a wide range of domestic problems specifically related to the levels of public deficit in the economy, as well as the excessive debt levels, soaring up to at least 223% of Portugal's GDP. Nonetheless, the government faces tough choices in its attempts to stimulate the economy, while attempting to maintain its public deficit around the EU average. In April 2011 Portugal Confirmed it will have a EU Financial bail-out from the European Union worth 80bn Euros ($115)(£70bn) Following Greece and the Republic of Ireland. It has been predicted that the Portuguese economy will not significantly recover until 2012. Standard & Poor's, S&P and Fitch have all severely downgraded their ratings on Portuguese government debt.Analysts expect Portugal will need up to €80 billion ($114.4 billion) - an amount bearable for Europe's finances.Portugal's short-term borrowing rates rose above what it would likely have to pay for bailout loans as the yield on five-year bonds on the secondary market hit 10 percent.Portugal's bankers have warned they won't be able to keep buying national debt as they wrestle with their own liquidity problems. Portuguese banks have been relying heavily on assistance from the European Central Bank.

As financing has dried up, companies could have problems finding money to pay wages. The unemployment rate last year reached a record 11.2 percent.

Front 24

PIIGS

Back 24

This acronym represents five fiscally vulnerable members of the European monetary union: Portugal, Ireland, Italy, Greece and Spain.

Front 25

Emergence of the BRIC’s

Back 25

Brazil, Russia, India, China and South Africa.
These five emerging economies are shaping the new international political and economic order. Goldman Sachs has argued that, since the four BRIC countries are developing rapidly, by 2050 their combined economies could eclipse the combined economies of the current richest countries of the world. These four countries, combined, currently account for more than a quarter of the world's land area and more than 40% of the world's population.Goldman Sachs predicts that China and India, respectively, will become the dominant global suppliers of manufactured goods and services, while Brazil and Russia will become similarly dominant as suppliers of raw materials.

Front 26

Accommodative monetary policy

Back 26

Monetary policy is the process by which the monetary authority of a country controls the supply of money, often targeting a rate of interest for the purpose of promoting economic growth and stability.The official goals usually include relatively stable prices and low unemployment. Monetary theory provides insight into how to craft optimal monetary policy. Monetary policy is referred to as either being expansionary or contractionary, where an expansionary policy increases the total supply of money in the economy more rapidly than usual, and contractionary policy expands the money supply more slowly than usual or even shrinks it.

What Does Accommodative Monetary Policy Mean?
When a central bank (such as the Federal Reserve) attempts to expand the overall money supply to boost the economy when growth is slowing (as measured by GDP). This is done to encourage more spending from consumers and businesses by making money less expensive to borrow by lowering the interest rate. Furthermore, the Federal Reserve also has the authority to purchase Treasuries on the open market to infuse capital into a weakening economy.

Also known as an "easy monetary policy".

Front 27

Carry Trade

Back 27

Investors borrow low-yielding currencies and lend (invest in) high-yielding currencies. It is thought to correlate with global financial and exchange rate stability and retracts in use during global liquidity shortages, but the carry trade is often blamed for rapid currency value collapse and appreciation.In theory, according to uncovered interest rate parity, carry trades should not yield a predictable profit because the difference in interest rates between two countries should equal the rate at which investors expect the low-interest-rate currency to rise against the high-interest-rate one. However, carry trades weaken the currency that is borrowed, because investors sell the borrowed money by converting it to other currencies.

Front 28

“Bailout”

Back 28

An act of giving financial assistance to a failing business or economy to save it from collapse.

Examples:
1) The US 50BN loan to Mexico (Mexican Financial Crisis
2) the 2010 Greece Bailout by the IMF/Eurozone countries of 110bn euro
3)TARP (Troubled Assets Relief Program) signed by president Bush in 2008 to purchase assets from financial institutions to address the subprime mortgage situation

Front 29

Contagion

Back 29

the spreading of a harmful idea or practice, when investors concerns about a default in one place, leads to panic about the possibility of default elsewhere

Think about: the tequila effect, etc...

Front 30

Hot money flows or hot capital  flows

Back 30

term that is most commonly used in financial markets to refer to the flow of funds (or capital) from one country to another in order to earn a short-term profit on interest rate differences and/or anticipated exchange rate shifts

Front 31

A rating downgrade

Back 31

A negative change in the rating of a ratable thing (including a security, a country that issues bonds, a company, etc...)

Additional Info: 1) S&P (Standard and Poors - a ratings agency) has downgraded the rating of 101/174 countries since 1989, this downgrade usually happens 6 months after a negative outlook change
2) Triple AAA rated countries include: Japan, Germany, the UK, Canada, and Switzerland, the US (thought the US recently received a negative outlook from S&P)

Front 32

Deficit reduction targets

Back 32

specific measures with specific dollars amount aimed at reducing the deficit

Front 33

Speculative attack

Back 33

A speculative attack in the foreign exchange market is the massive selling of a country's currency assets by both domestic and foreign investors. Countries that utilize a fixed exchange rate are more susceptible to a speculative attack than countries utilizing a floating exchange rate. This is because of the large amount of reserves necessary to hold the fixed exchange rate in place at that fixed level.

Front 34

Currency war

Back 34

Currency war, also known as competitive devaluation, is a condition in international affairs where countries compete against each other to achieve a relatively low exchange rate for their home currency, so as to help their domestic industry.

Front 35

Default

Back 35

A default is the failure to pay back a loan.Default may occur if the debtor is either unwilling or unable to pay their debt. In such cases, the defaulting country and the creditor are more likely to renegotiate the interest rate, length of the loan, or the principal payments.

Front 36

Risk premium

Back 36

A risk premium is the minimum amount of money by which the expected return on a risky asset must exceed the known return on a risk-free asset, in order to induce an individual to hold the risky asset rather than the risk-free asset. Thus it is the minimum willingness to accept compensation for the risk.

Front 37

Speculative attack

Back 37

A speculative attack in the foreign exchange market is the massive selling of a country's currency assets by both domestic and foreign investors. Countries that utilize a fixed exchange rate are more susceptible to a speculative attack than countries utilizing a floating exchange rate. This is because of the large amount of reserves necessary to hold the fixed exchange rate in place at that fixed level.

Front 38

Currency war

Back 38

Currency war, also known as competitive devaluation, is a condition in international affairs where countries compete against each other to achieve a relatively low exchange rate for their home currency, so as to help their domestic industry.

Front 39

Default

Back 39

A default is the failure to pay back a loan. Default may occur if the debtor is either unwilling or unable to pay their debt. In such cases, the defaulting country and the creditor are more likely to renegotiate the interest rate, length of the loan, or the principal payments.

Front 40

Risk premium

Back 40

A risk premium is the minimum amount of money by which the expected return on a risky asset must exceed the known return on a risk-free asset, in order to induce an individual to hold the risky asset rather than the risk-free asset. Thus it is the minimum willingness to accept compensation for the risk.

Front 41

commodity linked currencies

Back 41

currencies of countries which depend heavily on the export of certain raw materials for income. ex: Russia & Norway- oil

Front 42

NEER (nominal effective exchange rate)

Back 42

trade-weighted exchange rate index that measures currency movement against a country's largest trading partners

Front 43

fiscal consolidation

Back 43

policy aimed at reducing government deficits and debt accumulation

Front 44

fiscal profligacy

Back 44

irresponsible managing of budget ex: Bush tax cuts, early retirement age with comfortable pensions (Greece)

Front 45

debt sustainability

Back 45

ability of a debtor country to service its debt on a continuing basis and not go into default; make immediate and future interest payments on time with no restructuring

Front 46

Spread over Bunds

Back 46

The difference between German Bund (bond) and one other EU government bond.

Front 47

"vigilance on inflation"

Back 47

implies a rate increase (interest rates)

Front 48

resistance levels

Back 48

ceiling above which no one expected a currency to surpass

Front 49

"ultra-loose monetary stance"

Back 49

policy designed to stimulate economic growth by lowering short term interest rates, making money less expensive to borrow

Front 50

pros and cons of emu

Back 50

Pros
- reduced transaction costs
(don’t have to have cross border transactions)
- hope of greater price transparency (can make accurate comparisons)
(more price harmonization)
(has not happened as much as hoped)
- industrial specialization and increased trade and investment zones
(biggest plus in eu)
(spurred by no transaction costs
(more fdi than in Eurozone)

Cons

- When you join a currency union you are willingly putting yourself into straight jacket
- Giving up ability to have independent monetary policy
- Compromised policy designed to meet needs of Eurozone members
- Penalties applied to any Eurozone member who exceeded 3% gdp deficit
(EX: Greece was hiding deficit)

Front 51

EMU Stability and Growth Pact

Back 51

- agreement of 17 member states of European Union that take part in the Eurozone in order to maintain stability of the EMU
- pact adopted in 1997
conditions:
1. Annual budget deficit no higher than 3% of GDP
2. A national debt lower than 60%

Front 52

Central Bank Interventions in Currency Market

Back 52

- occurs when 1 central bank or more buy or sell currency in the forex market in order to raise or lower its value against another currency.
- This intervention happens when a nation's currency is undergoing excessive downward or upward pressure from market players - usually speculators.
- Decline in currency means the following things:
1. Raises price of imported goods, raises inflation. This causes CB to raise interest rates (which hurt economic growth)
2. Nation w large current account deficits that is dependent upon foreign inflows of capital may undergo a dangerous slowdown in the financing of its deficit, which will require rising interest rates to maintain the value of the currency and, could risk serious repercussions on growth.
3. Pushes up the exchange rate of the nation's trading partners and drive up the price of their exports in the global market place. This will also trigger serious economic slowdown, especially for export-dependent countries.

Front 53

"haircut"

Back 53

Lending: difference btwn the value of the loan and the collateral securing that loan

Anyone have anything else?

Front 54

Debt Restructuring

Back 54

NOT DEBT FORGIVENESS
Negotiate w creditors
What kind of plan can we work out?
Four types
1.Can delay interest payments
2. Can try to reduce interest payments
3. Delay payment of principle (extend the maturity date)
4. Reduce principle payments (haircut)
There is voluntary and involuntary
- voluntary: done in civil manner
- in voluntary: ex: when Greece announced that they cannot pay anything
-- there are serious repercussions (e.g. nobody will loan you money again and then how will you pay your public sector workforce?)

Front 55

Sovereign Debt Defaulting

Back 55

"I can’t make my regular payment"
• no money left
• bailouts occur – in response to default
• bailout troika
• short term temporary loans to prevent a default
-- sometimes not enough
• IMF lending to make interest payments

Front 56

SDR (special drawing rights) basket

Back 56

Is calculated as the sum of specific amounts of the four basket currencies valued in U.S. dollars, on the basis of exchange rates quoted at noon each day in the London market.

The basket composition is reviewed every five years by the Executive Board, or earlier if the Fund finds changed circumstances warrant an earlier review, to ensure that it reflects the relative importance of currencies in the world’s trading and financial systems. In the most recent review (in November 2010), the weights of the currencies in the SDR basket were revised based on the value of the exports of goods and services and the amount of reserves denominated in the respective currencies that were held by other members of the IMF. These changes become effective on January 1, 2011. The next review will take place by 2015.

(SDRs) are supplementary foreign exchange reserve assets defined and maintained by the International Monetary Fund (IMF). Not a currency itself, they represent a potential claim on the currencies of IMF member states for which they may be exchanged

A fictitious basket made up of 5 currencies (42% Dollar, 37% Euro, 11% pound sterling, 10% Yen) The Swiss Franc used to be in this basket, but as of Jan. 1, no longer is.

Front 57

Global imbalances or “persistent economic imbalances”

Back 57

The big current account deficits of US et al. vs. gigantic current account surpluses of China and a few resources exporters.

Front 58

Periphery vs. core (in eurozone)

Back 58

Periphery countries in the Eurozone are PIGS (Portugal, Irelands, Greece, and Spain
Core countries are Germany, France, Belgium, and the Netherlands.
The core countries usually regulate the policies that control the rest of the Eurozone, proves problematic because they are the most economic “stable” and do not always follow Eurozone monetary and fiscal policies, but expect the periphery to do so.

Front 59

Providing liquidity

Back 59

Means giving countries more loans, usually from the ECB (European Central Bank)

Front 60

High-yielding currency vs. low-yielding currency -

Back 60

High-yielding currencies are exactly that, currencies that provide high-yields (yields only uses nominal interest rates, which means they do not subtract out inflation). They include Brazil @ 11.75% and Russia @ 8%.
Low-Yielding currencies do not have high yields; they are US, Japan, UK

Front 61

Balance of Payments Sheets

Back 61

BoP is a statistical statement that systematically summarizes, for a specific period (typically a year or quarter), the economic transactions of an economy with the rest of the world. The international statistical standard for compiling such statistical statement is the Balance of Payments Manual (BPM) (the 5th edition being the latest) published by the International Monetary Fund (IMF).
--should add up to 0 when it is balanced

Front 62

iNFA = income credit – income debit

Back 62

When you take this equation, and the answer is negative, it means that the GDP is higher than the GNP, but if the sum is positive than the GNP is higher.

Front 63

Portfolio Investment

Back 63

Portfolio investment refers to investment in non-resident equities (i.e. stocks and shares) and debt securities (e.g. bonds, notes, negotiable certificates of deposits). Compared with direct investors, portfolio investors in equity and debt securities of non-resident enterprises have no lasting interest or influence in the management of the companies they invest. A holding of less than 10% equity in an enterprise is regarded as portfolio investment.

Front 64

Foreign direct investment

Back 64

The investment coming into the country from outside of the country

Front 65

Reserves

Back 65

The foreign currencies that a country’s central bank keeps in its “basement” in order to be used in case of emergency or to protect its currency or influence other’s currencies.

Front 66

GNP = C + I + G + X – M

Back 66

Gross domestic product (GDP) refers to the market value of all final goods and services produced within a country in a given period. It is often considered an indicator of a country's standard of living.

GDP = private consumption + gross investment + government spending + (exports − imports)

Front 67

Current transfers

Back 67

Current transfers are those transactions in which an economy provides real and financial resources that are immediately or shortly consumed by other economies without receiving equivalent values in return. Examples are workers remittances sent or received by residents to or from non-residents, and donations or gifts given or received by the government to or from other government or non-residents.

Credit entries reflect offsetting entries to the receipts of such real or financial resources from other economies. Conversely, debit entries recorded are offsets to the provision of such real and financial resources to other economies.

A cash transfer is classified as current transfer except when it is linked to the acquisition or disposal of a fixed asset. For example, if a Hong Kong migrant disposes a real property in Hong Kong at the time of emigration and takes the cash so arising to the new economy he migrates, such cash will be classified as migrant transfers under capital transfers which will be described later under Capital and Financial Account.

Current transfers, and transactions in real resources, have a direct and immediate effect on an economy's pattern of consumption in any specified period.

Front 68

Rebased

Back 68

meaning it's a trade-weighted exchange rate, representing the y-axis

Front 69

Greenback vs. Redback

Back 69

U.S Dollar vs. Chinese Renminbi (controversy because native america)

Front 70

Capital Controls

Back 70

One way to combat inflation, to slow capital inflow ex. not letting citizens leave the country w/ more than x amount of money or taxing inflows to discourage money coming into to country (Brazil)

Front 71

Absorption Approach

Back 71

Devaluation/Depreciation is NOT enough to fix BOP imbalance, you also need to cut back on govt spending and encourage savings

Front 72

Elasticities Approach

Back 72

Favored by Politicians that assume Marshall-Lerner condition holds. They think the currency depreciation will fix trade balance

Front 73

Marshall- Lerner Condition

Back 73

If it holds, depreciation/devaluation should improve trade balance in the long run
- assumption: a depreciation or devaluation will improve the trade balance (and in tune to the current account) if the M-L hold true
- price up, demand down
- price down, demand up

Front 74

J-curve Effect

Back 74

With currency depreciation, things will get worse before they get better
- after depreciation trade balance will get worse before it gets better
- M-L must still hold true

Front 75

Relative Inflation Rates

Back 75

High Inflation leads to currency depreciation

Front 76

Relative Money Supply

Back 76

If your Central Bank is printing money faster than the other country's Central Bank, then we can expect depreciation.

Front 77

Relative PPP

Back 77

% change in country A prices - % change in country B prices = % change in the exchange rate

Front 78

Law of One Price

Back 78

States that identical goods should cost the same in all nations

Front 79

Purchasing Power Parity

Back 79

application of the law of one price, currency prices adjust to make goods and services cost the same, everywhere

Front 80

The Big Mac Index

Back 80

Shows if currencies are over/under valued by applying PPP/law of one price comparing the price of big macs at Mc Donalds across the world

- THIRD COLUMN of big mac index (implied ppp of the dollar)

Front 81

Unemployment

Back 81

if it rises or doesn't fall quickly enough, then the higher expectation that central bank will lower/not raise interest rates:

Low interest rates lead to depreciation

Front 82

Change in relative income growth

Back 82

leads to higher demand for imports and as imports increase, currency depreciates

Front 83

Trade Balance - exchange rate

Back 83

Higher amount of exports, leads to currency appreciation

Higher amount of imports, leads to currency depreciation

Front 84

Interest rates relating to exchange rates

Back 84

Low interest rates, leads to currency Deprecation

High interest rates leads to currency appreciation

Front 85

Success of EMU depends on

Back 85

1. fiscal discipline
2. labor migration
3. wage flexibility
4. external disturbances
5. internal shocks
6. political wrangling to ECB

Front 86

ECOFIN

Back 86

finance ministers (fiscal) and central bank (monetary) of EU

Front 87

EMU

Back 87

European Monetary Union

Front 88

ERM II

Back 88

- fixed peg for others in the eurozone that don't use the Euro
- must maintain the peg w/ no appreciate/depreciate for 2 years in order to qualify for eurozone

Front 89

ERM I

Back 89

european exchange rate mechanism I
- 1990s: all currencies tied together
- France/Spain/Italy wanted to low interest rates to promote economic growth/adds high unemployment
- everyone buys german deuschmarks with high interest rates

Front 90

to determine if GNP or GDP is bigger...

Back 90

add income credit and income debit
if + GNP is bigger
if - GDP is bigger

Front 91

EMS

Back 91

european monetary system

Front 92

elasticities approach

Back 92

assumes Marshel Learner holds
- 4J cureve will happen and ch. current acocount
- don't defend currency from speculative attack

Front 93

trade balance of PoP

Back 93

x - m: both goods and services

Front 94

CIVETS

Back 94

Colombia, Indonesia, Vietnam, Egypt, Turkey, South Africa, coined by Financial Times; more suitable to include S. Africa in CIVETS than BRICS. Economy is more to scale with CIVET

Front 95

"managed" ER regime

Back 95

not buying/ selling for EX to move mkt one way or another
- policy measures
- minor capital controls

Front 96

"dirty" ER regime

Back 96

verbally/psychologically affected the markets

Front 97

foreign assets

Back 97

foreign currency, company, goods, stock shares, bonds, etc

Front 98

Why is the yen appreciating with every aftershock?

Back 98

- japanese selling off foreign investments/assets to buy back home for rebuilding *repatriation of funds

Front 99

BoP Accounting "Debits"

Back 99

(not neg)
= capital leaving the country to go abroad ($ unrested abroad/imported, etc)
- ownership of foreign assets

Front 100

Exchange Rate Determination

Back 100

unemployment
regulating money supply, inflation rates, interest rates, income growth,
- bilateral trade balances, protectionism, change in governing
- campaigning to buy domestic intl boycots

Front 101

interest rates for inflation and unemployment

Back 101

inflation: up interest rates
unemployment: down interest rates

Front 102

QE2

Back 102

-quantative easing
- keeping interest rates
- low to stimulate econ

Front 103

Protectionism leads to --->

Back 103

importing less --> need less forex --> appreciation of domestic currency

Front 104

is unemployment a concern?

Back 104

unemployment --> Central Bank down interest rates to stimulate economy --> lower rate of return --> lower demand for currency --> depreciation

Front 105

relative increase in GDP growth causes (2) b/c of...

Back 105

Depreciation: due to unwise govt spending or excessive consumer spending on imports

Appreciation: if due to real productivity gains

Front 106

higher interest rates lead to ...
lower lead to...

Back 106

appreciation
depreciation

Front 107

Example of coordinated intervention

Back 107

3 largest CBs: ECB, FED, JCB
- simultaneously selling off yen to push down value/price to help Japan in aftermath (particularly exporters)

Front 108

to push up value of a currency...
to push down value of a currency...

Back 108

buy up!
sell-off

Front 109

intervention

Back 109

using forex reserves to buy up own currency to keep currency from collapsing from speculative attack

Front 110

forex reserves includes...

Back 110

- key currencies ($, euro, franc, british pound, yen)
- swiss franc
- gold

Front 111

currency movement graphs

Back 111

- should have unverted y axis to indicate appreciation

Front 112

NEER vs REER

Back 112

nominal or real (corrected for inflation)
- effective exchange rate

Front 113

trade weighted exchange rate

Back 113

what a country's currency is doing on average compared to trading partners

Front 114

commodity linked currencies

Back 114

1. russian rouble
2. canadian $
3. australian $
4. NewZealand $
5. Norwegian Krona
6. Chilean Peso

Front 115

SDR

Back 115

special drawing rights
- weighted basket
- pound, euro, swiss franc

Front 116

"risk appetite"
buoyant v fading

Back 116

currency traders willing/less willing to bet on currencies that unsure about (commodity linked)

Front 117

if real us interest rates rise and bank of englad keeps real Uk interest rates
short run:
US $ will -- vs British #

Back 117

appreciate

Front 118

S. korean currencies will _____ vs currencies of trading partners if S. korea encourages citizens to only buy domestically produced goods and services, and raise import trader barriers

Back 118

appreciate

Front 119

US productivity gains lower than canada's consistently US $ expected to ____ vs Canadian $

Back 119

depreciate

Front 120

Mexico's inflation rate consistently lower than Columbia's. Therefore expect the mex peso to ____ vs colombian peso in long run

Back 120

appreciate

Front 121

absorption approach

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a country cannot just rely on depreciation to eventually improve a trade balance -- also cut spending!

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inFA

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net factor income from abroad

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BRICS

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brazil, russia, india, china, s africa

Front 124

in order to experience an export led recovery...

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currency must depreciate (why country's stuck to a fixed bed - Argentina cant experience it)

Front 125

K-inflow leads to (2)

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(1) appreciation of a currency
(2) asset price bubbles

Front 126

How can appreciation lower inflation and how?

Back 126

Puts downward pressure on prices by way of imported consumer goods/imported inputs

Front 127

Characteristics of QE
QE=loose monetary policy=injecting liquidity into the market

Back 127

•keeping interest rates low
•open market operations (The Fed buys bonds from the banks)
•lower reserve requirements

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"haircut"

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investors who suffer a cut in their returns

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Bears

Back 129

Expect something to fall (depreciate)

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Bulls

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Expect something to appreciate

Front 131

inflation v. unemployment trade-off

Back 131

raise interest rates->
(1) slows inflation
(2) slows economy

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How does depreciation fuel inflation?

Back 132

Depreciation makes imports much more expensive and imports are a share of the consumption pie. Imported input are also more expensive which raises production costs.

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What led up to the 2008 Crisis?

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Complicated derivatives that were unethical; no laws to address derivative markets.

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dovish

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Refers to an economic outlook which generally supports lower interest rates

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hawkish

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Monetary Policy which favors higher interest rates, tighter monetary controls and restrictive credit policy.

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US lacks credibility on debt, says IMF (FT article) What precisely is the IMF calling for?

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Fiscal adjustments: more sizable reductions in medium-term deficits are needed and will require broader reforms including to social security and taxation.

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What measures will help Portugal kick its debt habit? (FT article) (3 things)

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rescue package that:

(1) sustainable public finances
(2) liquidity for financial system and capital
(3) if needed, economic reform focused on lifting the country's growth potential

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Interest Parity Condition

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expected % change in exchange rate= difference in interest rates