Fixed Rate System: Preview of Results

Slides:



Advertisements
Similar presentations
Mechanisms of International Adjustment © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except.
Advertisements

CHAPTER 3 THE INTERNATIONAL MONETARY SYSTEM. CHAPTER OVERVIEW I. ALTERNATIVE EXCHANGE RATE SYSTEMS II.A BRIEF HISTORY OF THE INTERNATIONAL MONETARY SYTEM.
Copyright ©2000, South-Western College Publishing International Economics By Robert J. Carbaugh 7th Edition Chapter 14: Balance-of-payments adjustments.
© 2004 Pearson Addison-Wesley. All rights reserved 20-1 Exchange Market Intervention Unsterilized: Fed sells $1 billion of $, buys $1 billion of foreign.
Money in the US a brief history 1787 – 1963 – Notes from differentstate chartered bankswere circulating – National Banks notes issued by nationally.
The Goods Market, Money, and Foreign Exchange The Linkages.
Basic Theories of the Balance of Payments
Monetary Policy: Goals & Targets Chapter 18. Goals of Monetary Policy Goals 1.High Employment 2.Economic Growth 3.Price Stability 4.Interest Rate Stability.
The International Flows of Goods and Capital International trade in goods and capital increase consumption possibilities beyond production possibilities.
Fixed Rate System: Preview of Results Recall: i – i* =  -  * = Expected deprec of $ When $ can’t depreciate: i = i* … Monetary discipline  =  * … Price.
The Mundell-Fleming Model How international capital mobility alters the effects of macroeconomic policy Lecture 13: Mundell-Fleming model with a fixed.
Foreign Exchange and Currencies Economics 71a Spring 2007 Mayo, Chapter 6 (skim) Lecture notes 2.6.
The International Financial System
Copyright ©2004, South-Western College Publishing International Economics By Robert J. Carbaugh 9th Edition Chapter 14: Exchange-Rate Adjustments and the.
Exchange Rates and the Open Economy Chapter 18. Foreign Exchange Market Abbreviation: FOREX Over a trillion dollars worth are traded daily. Most trading.
EXCHANGE RATES AND THE MARKET FOR FOREIGN EXCHANGE Lecture 05 /06.
External Sector Econ 102 _2015. External Sector How is a country linked with other countries in the global world? 1)There are exchange of Goods and Services.
Balance-of-Payment Adjustments Chapter 13 Copyright © 2009 South-Western, a division of Cengage Learning. All rights reserved.
The portfolio approach to BOP and exchange rate determination Concepts and exemplification.
© Pilot Publishing Company Ltd Chapter 12 International Finance I --- Exchange Rate.
External Sector Econ 102 _2013. External Sector How is a country linked with other countries in the global world? 1)There are exchange of Goods and Services.
Balance of Payments and Foreign Exchange
The Balance of Payments: Linking the United States to the International Economy Current account records a country’s net exports, net income on investments,
Session 23 Internal and External Balance with Fixed Exchange Rates.
1. Definitions The balance of payments is a form of state book keeping, where monetary inflows and outflows are recorded The number of transaction depends.
Chapter 5: Foreign Exchange Markets and the Balance of Payments
Chapter 19 The International Financial System. Copyright © 2001 Addison Wesley Longman TM Exchange Market Intervention Unsterilized: Fed sells $1.
Copyright © 2006 Pearson Addison-Wesley. All rights reserved Introduction We saw how a single country can use monetary, fiscal, and exchange rate.
Determination of exchange rates By Mr. Benz & Mr. Win.
Chapter 12 International Linkages Introduction National economies are becoming more closely interrelated Economic influences from abroad have effects.
Lecture Material: International Economics By: Wijayanto Samirin and Garry Pawitandra Poluan
Rethinking the Great Depression ECO 473 – Money & Banking Dr. D. Foster.
Chapter 19 The International Financial System. Copyright © 2002 Pearson Education Canada Inc Exchange Market Intervention Unsterilized: Bank sells.
Purchasing power parity (PPP): The Law of One Price … in long run A good should cost the same in all countries (aside from tariffs or transportation costs)
Macroeconomic policies in an open economy Frederick University 2013.
Trade Balance/Savings and Investment. Government Budgets G+TR>T G+TR-T> 0 – Government Surplus G+TR
External Sector Econ 102 _2013. External Sector How is a country linked with other countries in the global world? 1)There are exchange of Goods and Services.
Rethinking the Great Depression ECO 473 – Money & Banking Dr. D. Foster.
EXCHANGE RATE DETERMINATION
Need the Fed? ECO 285 – Macroeconomics – Dr. D. Foster The Gold Standard: the meaning of sound money.
The Great Depression … of 1921 & the Gold Standard ECO 473 – Money & Banking Dr. D. Foster.
INTERNATIONAL ECONOMICS, 15E Robert Carbaugh © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part,
Chapter 9 The Balance of Payments and Exchange Rates
The Great Depression … of 1921 & the Gold Standard
Exchange Rates The rate at which one currency can be exchanged for another e.g. £1 = $1.90 £1 = €1.50 Important in trade.
HISTORY OF EXCHANGE RATE SYSTEMS
History of Exchange Rate Systems
Principles of Economics 2nd edition by Fred M Gottheil
Exchange 12/ 02 / 09 Exchange of goods and services
International Economics By Robert J. Carbaugh 9th Edition
International Economics By Robert J. Carbaugh 9th Edition
The International Flows of Goods and Capital
Capital Flows and the Balance of Payments and The Foreign Exchange Market Lesson 39 Sections 41, 42.
The Great Depression … of 1921 & the Gold Standard
Eco 200 – Principles of Macroeconomics
The Federal Reserve The Gold Standard: A Critique
International Economics
The Mundell-Fleming Model
Basics of International Finance
The Great Depression … of 1921 & the Gold Standard
Open-Economy Macroeconomics: Basic Concepts
Basics of International Finance
The International Financial System
The Gold Standard: the meaning of sound money
Open-Economy Macroeconomics: Basic Concepts
The Balance of Payments, Exchange Rates, and Trade Deficits
The Price Adjustment Mechanism with Flexible and Fixed Exchange Rates
EXCHANGE RATES.
Sample Question I EC Fall.
Presentation transcript:

Fixed Rate System: Preview of Results Recall: i – i* =  - * = Expected deprec of $ When $ can’t depreciate: i = i* … Monetary discipline  = * … Price (and wage) discipline

Fixed Rate System: How it works Central bank (CB) buys and sells its currency ($) on foreign exchange markets to keep the exchange rate fixed It dips into its reserves of “gold” and foreign currencies to buy $ … keep $ from falling It buys reserves with $ … keep $ from rising When CB buys $ (sells reserves) M When CB buys reserves with “new” $ M 

Fixed Exchange Rate System: Automatic Adjustment of BoP Recall: MV = PQ When S$ > D$ and the Central Bank buys excess $ M  … P  … X  … D$  M  … i  … Capital Inflows  … D$  M  … i  … Q  … Im  … S$  The balance of payments balances

Fixed Rate System: Discipline Wage and price discipline If W  and P  … D$  CB buys $ to keep $ from falling … M  … P  Monetary discipline If M  … P  and i  … X  and Capital Inflows  … D$  CB buys $ … M 

Gold Standard: The Mother of Fixed Rate Systems Money was either gold coin, currency backed by gold issued by central bank, or bank deposits backed by currency Each currency’s value was fixed in terms of gold, e.g., 1 oz. of gold = $22 Gold could flow freely internationally You could redeem your $ for gold, ship the gold to England (or France or wherever), and buy the local currency with the gold

Gold Standard: Automatic Adjustment Mechanisms Humian Mechanism P  … D$  … BoP Deficit … Gold Outflow … M  … P  Interest Rate Mechanism P  … D$  … BoP Deficit Threatens … “Bank Rate”  … Capital In Income Mechanism … “Bank Rate”  … I  Q  Im 