International Economic Policy

International Fluctuations International business cycles –international financial interdependence –international trade multiplier –the desirability of co-ordinating national macroeconomic policies The growing volatility of exchange rates –increased stock of capital –increased mobility of capital –growth in speculation –adoption of domestic macro targets –conflicts in policies between countries International business cycles –international financial interdependence –international trade multiplier –the desirability of co-ordinating national macroeconomic policies The growing volatility of exchange rates –increased stock of capital –increased mobility of capital –growth in speculation –adoption of domestic macro targets –conflicts in policies between countries

The G7/G8 meetings –problem of divergence of economies The G7/G8 meetings –problem of divergence of economies International Harmonisation of Economic Policies

Macroeconomic indicators for the G7 countries

International Harmonisation of Economic Policies Difficulties in harmonising policy –convergence in one objective may lead to divergence in another –conflicting policy objectives –unwillingness of countries to gear domestic policies to international objectives –G8 policies are not binding Reactions to SE Asian crisis of 1997/8 The future for co-operation Difficulties in harmonising policy –convergence in one objective may lead to divergence in another –conflicting policy objectives –unwillingness of countries to gear domestic policies to international objectives –G8 policies are not binding Reactions to SE Asian crisis of 1997/8 The future for co-operation

European Economic and Monetary Union The ERM –features of the ERM –the 1980s –crisis in the ERM events of 1992 events of 1993 –a return of calm The ERM –features of the ERM –the 1980s –crisis in the ERM events of 1992 events of 1993 –a return of calm

European Economic and Monetary Union The Maastricht Treaty –the timetable for EMU –the convergence criteria inflation interest rates budget deficits general government debt exchange rates Birth of the euro –meeting the convergence criteria –role of the European Central Bank (ECB) The Maastricht Treaty –the timetable for EMU –the convergence criteria inflation interest rates budget deficits general government debt exchange rates Birth of the euro –meeting the convergence criteria –role of the European Central Bank (ECB)

How desirable is EMU? –Advantages of a single currency eliminating conversion costs increased competition and efficiency elimination of exchange-rate uncertainty increased inward investment lower inflation and interest rates –Disadvantages of EMU political arguments adjustment to shocks –problem of asymmetric shocks EU12 may not be an optimal currency area regional problems How desirable is EMU? –Advantages of a single currency eliminating conversion costs increased competition and efficiency elimination of exchange-rate uncertainty increased inward investment lower inflation and interest rates –Disadvantages of EMU political arguments adjustment to shocks –problem of asymmetric shocks EU12 may not be an optimal currency area regional problems European Economic and Monetary Union

Policies for Achieving Currency Stability The size of currency flows across the international exchanges Controlling exchange transactions? –capital controls –transactions tax ('Tobin' tax) –non-interest-bearing deposits Objections to controls Exchange-rate target zones –varieties of adjustable and movable pegs –advantages and problems The size of currency flows across the international exchanges Controlling exchange transactions? –capital controls –transactions tax ('Tobin' tax) –non-interest-bearing deposits Objections to controls Exchange-rate target zones –varieties of adjustable and movable pegs –advantages and problems